Craig Atkinson

Two of the most interesting market trends to watch right now are what is happening in Japan and with gold. Both are climbing steadily and making multi-year highs. Many market observers are betting on these trends to continue.

Here’s a 3 month chart of the iShares Japan (EWJ) vs. a gold price tracker ETF (GLD).

Here’s a 1 year chart of the same thing.

It’s pretty interesting to me to see gold really take off through $500/oz in the past few days. On the three month chart, gold has just recently outperformed Japan. I have been hearing people talk about it since a Vancouver Technical Analyst Meeting in July when it started to break out of its long-term resistance.

Just looking at these two charts also suggests something interesting about the correlation between gold and Japan. I was listening to an MP3 yesterday that I downloaded from some gold website. A financial analyst has previously claimed that “Our grandchildren will never see gold at $500″ and the interviewer had fun bringing him back and talking about what is now happening. He pointed at what he called the x-factor in the gold story and said that the x-factor was Japan. After 10 years of deflation in Japan, they are finally emerging due to reforms completed over the past few years. Gold priced in yen has doubled (100% increase) in past five years. These things point to the fact that Japan is finally emerging from deflation and back into an inflationary economy. He claims that the movement in gold is a Japanese story as nervous investors are protecting themselves against this very real inflation. He says to observe carefully what the Bank of Japan (BOJ) is doing and when they finally start to raise interest rates from near-zero, we can expect to see the price of gold bullion fall.

I expect there is an element of truth in his analysis although I think the new gold rush is only partially driven by Japan. I do like his idea to reduce gold positions when the BOJ raises rates and expect that will not be likely until the middle of 2006 at the earliest. The governor of the BOJ has been speaking recently about when is the best time to raise rates and it appears they are in no hurry after spending 10 years in deflation.

These are interesting ideas about Japan and gold and I’m watching these two markets very carefully.