He Argues Gold Today Is More Like A Currency Than A Commodity

One of the technical analysts we keep an eye on is JC Parets of All Star Charts. In a recent email, JC makes the case for gold continuing to climb higher in value next year. He created a handful of charts showing gold's price trajectory this year in 9 different currencies (the idea being that you have to look at gold's value beyond the U.S. dollar). He makes the argument that perhaps we should be thinking of gold the same way we think of currencies in terms of our outlooks rather than lumping it into the commodities bucket.

So, we looked at the correlation between gold and the major currencies (and emerging markets) and sure enough, the correlation values are positive and pretty strong.

Gold and JPYUSD, for example, was a .69 correlation recently when looking at the 5-day average correlation value. As you can see from the chart below, the correlation relationship was consistently strong over the past 6 months. But there were times when it turned to a negative correlation relationship.

That suggests a trading opportunity. Using the pair trading tool in Excalibur Pro, we looked into a correlation pair trade between JPYUSD and gold, beginning June 1 of this year. We set our trade parameters to enter a trade when the correlation ratio was at 2 times the average ratio and exit when it crossed 1.75 times the average ratio. The results were interesting.

We entered a short-spread trade on June 7 (short gold, long JPYUSD). At the end of June 8, that trade offered a 65% annualized return. On Sept. 7, we would have entered another short-spread trade. But the one-day trade result was a negative 25%. However, if you had gutted it out for one more day, exiting the trade on Sept. 9 would have resulted in a 476% annualized return. Another short-spread trade would be entered on Oct. 3. This one would take a full week to become profitable (+45% annualized return if you exited Oct. 10). Finally, another short-spread trade would have been entered on Friday Dec. 9. If you exited on Monday Dec. 12, the annualized return would have been 203%.

We will continue to keep an eye on this one!