Finding Haven in Yen Away from Gold

The biggest daily decline in gold in over 33 years was overshadowed by the tragic news of 2 explosions at the Boston Marathon, where 2 people were killed and 23 injured. While no details are known regarding the nature of the attacks, the sell-off in the market was exacerbated in equities, commodities, European and commodity FX, to the benefit of the Japanese yen and the US dollar. Bonds posted their 3^rd straight daily gain, as the US 10-year yield touched its lowest level since 12/12/2012.

Gold suffers its biggest daily percentage and point decline drop since March 1980.

Gold fell 9.7% on the day ($136), hitting as low as 1,336 – its lowest since Feb 3, 2011.

Silver had a bigger fall, down 12% to $22.60, lowest since Oct 8, 2010.

The complete absence of any rally in gold in response to the tragic events in Boston highlights the deepening erosion of gold’s safe haven appeal as forced selling and cascading of stops results from a by-product of margin calls at the Shanghai gold exchange and forced liquidations of commodity and macro funds.

The plunge in gold and silver was also accelerated by reports that the Shanghai Gold Exchange may hike margins on gold and silver contracts to 12% and 15%. Margin hikes were carried out in 2011 by Comex in order to stabilize speculation, whereas an increase in Shanghai following violent price plunge may reflect the stability of the Exchange’s clearinghouse.  Look out for further retesting of the 1350s level, as it represents the 30% decline from peak to trough, a magnitude never exceeded over the last 11 years.

Look out for further selling of gold and silver in Tuesday morning Asia if the Shanghai Gold Exchange proceeds with warnings to raise margin requirements in gold and silver.

Mrs. Watanabe Sells Gold

The yen is the strongest performing currency of the day, beating even the USD, whose rally was driven by gold’s damage. But yen weakness of the past 2 weeks has not dissuaded Japanese investors from dumping the yellow metal. This is leading to gold’s decline in yen terms, which we alerted on Friday here

The latest yen rally may have proven fortuitous and well timed for Japanese officials ahead of this week’s G20 meetings as it deflects attention from Tokyo’s quantitative easing and the recent rumblings over currency manipulation. Recall that at the November G20 meeting Moscow, questions arose as to whether nations will protest Abe’s quantitative easing. Apart from some criticism by China and Brazil, the G7 as well as the IMF gave Japan’s Abe full approval to escalate purchases, the result of which has been inevitable yen weakness. We may hear some details about whether the purchase of foreign bonds will be encouraged, but at the end of the day, the medium to longer term move remains yen weakness. 95.00 in USDJPY will have to be sustained this week in order to maintain the weekly trendline and preserve the 5-month uptrend.