Gold, a traditional safe haven asset, and the Japanese Yen are one of the best performers of 2016. The Japanese Yen is up more than 15% against the US dollar, while the yellow metal has gained more than 26%.

Brothers under the skin

There appears to be a strong correlation between gold and Yen, if we take into account the price action on a larger time frame. For example – Gold topped out in September 2011 while Dollar‐Yen bottomed out in Oct 2011 (Yen topped out).

Since then gold lost about 45%, while Yen shed more than 60%. Gold then bottomed out in Dec 2015 and USD/JPY topped out in June 2015 (Yen bottomed out). Yen was the first to bottom out as markets were slowly realizing that the Bank of Japan (BOJ) is running out of ammo.

At make or break level

Gold monthly chart Chart Source – Netdania

The metal is attempting a bullish break above the long‐term falling trend line hurdle of $1345. Going purely by chart rules, we need a month end closing above $1345. Such a move would mark a bullish break from ‘flag and pole’ formation – a continuation pattern; signaling continuation of the rally from Oct 2008 low.

However, we have a Fed rate decision on September 21. The market believes there is a zero chance of a rate hike this month and the Fed is unlikely to shock the markets by moving rates. But if the central bank intends to move later this year, it could start building up ground via a September policy statement.

In case the bank stays neutral, gold could blast, taking out $1400 levels. Note that except for the talk of the next Fed rate hike there is nothing out there that warrants lower gold prices.

The following factors remain supportive of gold:

• Search for yield forces investors to pour money into zero yielding assets like gold
• Negative rates and the resulting uncertainty
• Central bank exhaustion (BOJ)
• Increased odds of massive fiscal stimulus across advanced world; which could result in inflation
• Low global growth

Bearish scenario

The only way gold could fail at the major trend line hurdle and resume a retreat towards the $1100 mark is if the Fed somehow convinces markets that the path of policy tightening is going to be steeper than expected. However, the odds of Fed doing such a thing are next to zero.

USD/JPY monthly chartChart Source – Netdania

Losses in the pair over the last three months have been restricted around the descending trend line (drawn from 1998 high to 2007 high) support, which as of now is seen around 99.50.

What goes up must come down

The rise in Yen should not be surprising since BOJ exhaustion means the entire rally from Nov 2012 to June 2015 could be erased unless the dollar side of the story strengthens. However, we have seen earlier that odds of a rate hike in US are low and the path of tightening is going to be flatter than ever.

Meanwhile, both BOJ and Japanese government are stuck. The problem with QE is similar to that of steroids in sports. Both work wonders when they are ‘on’. If overdone (the way Japan did with QE), it leads to exhaustion and unwinding of QE led moves.

The Fed’s neutral stance at September meeting could be the final blow to USD/JPY bulls. A month end close below 99.50 would open doors for a much deeper sell‐off towards 94.00 and 90.00 levels.

Bullish scenario

The only factor other than a Fed rate hike that could lift the USD/JPY pair is an outright fiscal crisis in Japan. Moreover, out of desperation (helicopter money)  the BOJ and Japanese government could end up triggering a JGB sell‐off (and spike in yields) and slide in Japanese Yen.