By Eric Bush, CFA - Gavekal Capital Blog
Since the financial crisis, a stronger yen has generally been associated with rising inflation and inflation expectations in the United States. The US is a very important export market for Japan as 18% of all Japanese exports are sent to the US. Over approximately the past four years, a weaker yen has kept US import prices about 2-3% lower than they otherwise would have been. However, this dynamic looks like it is shifting again. Our models project that the recent strengthening of the yen will increase US import prices from Japan by about 2% over the next six months.
A stronger yen has already helped to boost inflation expectations. Since February 11th, 10-year TIPS implied breakeven inflation has increased from 118 bps to 158 bps. During this period, the yen has strengthened by about 8%. A further strengthening in the yen could increase inflation expectations by 30-50 bps.
All of this seems to support higher gold prices. The yen has had -0.61 correlation to gold prices since 1967 (i.e. gold prices have increased as the yen has strengthened against the dollar). The correlation has increased to -0.73 since 2000. If the yen strengthens by another 5-8%, we would expect gold prices to most likely be around $1350-$1400.