Yen squeeze bolsters silver, gold

A reversal of the carry trade buoys precious metals for the first time since last summer.

By Anthony Mirhaydari Jun 3, 2013 2:16PM

This market hasn't been driven by fundamentals for a long time. Instead, things like extreme bullish sentiment and the pace of central bank easing have been all that matters.

 

Yet more than anything, stocks have been rising and falling based on what's happening in the currency market, specifically, the yen vs. the dollar. The "yen carry trade" became overcrowded over the last few months as the Japanese have purposefully weakened their currency in a last ditch effort to revitalize their economy.  

 

It hasn't worked. And now, with the U.S. ISM Manufacturing Index falling back into recessionary levels as factory activity slows, the trade is violently unwinding. Gold and silver, which have been hammered since late last year as the dollar strengthened, are benefiting in a big way. 

 

 

 

Gold Bars copyright Stockbyte, SuperStockThe yen carry trade was simple: Sell the yen short, and use the proceeds to buy U.S. dollar-denominated assets. Like stocks. When it worked, hedge funds would profit from both legs of the trade. They would get the currency benefit as the yen dropped against a rising dollar. And they would profit from the rise in their stock holdings.


But all that implied leverage works in reverse too. And we're seeing that on Monday as the drop in the ISM index pinches both sides of the trade. 


The yen is trading against the dollar with a strength not seen since last August. And the disappointing economic data is dragging stocks down too.


 

 

 

And all of this is calling into question hopes a weaker yen would boost Japan's economy. Futures in the Nikkei index have entered bear market territory, down more than 20% from their recent high as Japanese banks like Mitsubishi UFJ Financial Group (MTU) are crushed.

 

 

The big beneficiaries are the precious metals, which had been left for dead by investors. Both gold and silver are pushing to the top end of their recent basing patterns while mining stocks like AuRico Gold (AUQ) and Silver Wheaton (SLW) are breaking to the upside or are preparing to.

 

 

Today, I'm adding AUQ, SLW, and the VelocityShares 3x Silver (USLV) to my Edge Letter Sample Portfolio. Less risky alternatives to the USLV include the ProShares Ultra Silver (AGQ) and the iShares Silver Trust (SLV).

 

Disclosure: Anthony has recommended USLV, SLW, and AUQ to his clients.

 

Check out Anthony's new investment newsletter, the Edge, and his money management service, Mirhaydari Capital Management. A two-week free trial has been extended to MSN Money readers. Click the link above to sign up. Mirhaydari can be contacted at anthony@edgeletter.c​​​​​​​​​​​​​​​​​om and followed on Twitter at @EdgeLetter. You can view his current stock picks here. Feel free to comment below.


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19Comments
Jun 3, 2013 3:41PM
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Manufacturing Index at lowest since June 2009 and Waco Street  is happy because they think the bond buying will continue longer.
Jun 3, 2013 4:18PM
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We just watched Ben Bernanke pump enough fake money to lift the Dow 80 points in the last ten minutes of activity. We have NOTHING when they have to use power tricks to achieve results that only prove they NEVER knew what they were doing. QE-- it's killing America.
Jun 3, 2013 4:13PM
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It should be no surprise that Kamikaze QE (Quantitative Easing) is good for gold and silver.
Jun 3, 2013 4:24PM
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Give Anthony two years and he can make you a millionaire. Provided you started as a billionaire.
Jun 3, 2013 4:21PM
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There were more Market Manipulators 'chokin their chickens' today than a porn shop private booth.
Jun 3, 2013 5:55PM
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Well I just finished posting on the article about Games of Thrones. Reading the comments there, it's no small wonder why this country is falling apart. Folks spend their time reading the wrong books and watching the wrong TV shows. America is becoming Dumb about America as Uncle Ben pulls the proverbial wool, over our eyes.

Finishing High School nor College won't teach you about life. Nor will watching the Game of Thrones. The educational system is spitting out one dimensional thinkers that run more on emotions and very little on facts. This is all about less folks making a living wage. No amount of Global Money printing by Feds will solve that.

Jun 4, 2013 3:40AM
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OK Anthony, I'm not following this one. Are you saying the other side of the Yen trade has been PMs? Or just that the bounce-back of the Yen and lowering the dollar is just causing the typical rise in PMs? Because lately I see more correlation between FXY and GLD than diversity. Of course I do see FXY and UUP being negatively correlated, but that's just an identity.  

 

In any event, the only question is whether Japan will be ABLE to create inflation, even with their attempt to devalue the Yen. If we're all falling into a recession then the answer is NO, so the Yen is bouncing back. Not sure why this should be positive for PMs, except in the knee-jerk "QE is good for PMs" response--which I'm not sure is real.

Jun 3, 2013 8:08PM
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The problem with V_L or maybe to his advantage is he is on the Doomdayer's Article...

 

Pessimist may enjoy reading some of this, therefore they comesurate(sp) with him and Anthony..

And a strong showing with the silly thumbs thing..??

 

Ahhh, "Birds of the feather, flock someplace."  ?? 

Jun 4, 2013 9:22AM
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V_L....Hardly got to my age, by being "narrow minded" and hardcore to any new ideas...

I lived and breathed the stuff....

And I didn't get here by being a pessimist either; Skeptical, analytical maybe ?

 

Pessimism has it's place, similar to any emotion; Overdone it becomes a handicap.

I thought many times the sky was going to fall, but it only happened a few times in my life.

Therefore I like to think I/we have about a 75-80% chance of success in everything we do..

I like those odds, as long as that 20% doesn't kill you....Still alive.

If we had displayed the tendancies of failure, the majority of our lives, our children and grandchildren would probably carry on the same tradition....They have all done pretty well in their own right..

I would like to think we were a part of that, and we are proud of them...We attempted to pass on values to them, as passed to us..And I have encouraged them to always question,even ourselves,

otherwise the learning process may stop....They learn, as so do we...

If we ran around, mumbling "the sky is falling", they may have been destined to do the same?

We decided long ago;  To make Lemonade.

Jun 4, 2013 9:48AM
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Another item...Concerning point or counter-point..for you V_L.

I find this Forum hardly the place to debate, discuss or have any lenghty conversations on any topic.

Particularily day after day, after day.....To me, it gets pretty boring after a while and I do not have the time for it..

The tit for tat, becomes inevitable in due time; And I believe I can find better ways to enjoy myself.

Although somewhat amusing at times, and also a learning experience occassionally..

I still would rather smell the flowers then just look at them..

Repetitive statements are what they are, and I believe most understood them, the first time mentioned?

So to harp on and on for most, seems only a poor attempt in futility to me. 

Jun 3, 2013 3:43PM
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Anthony said gold was buy @ $1400 he may have hit it on the head this time..still not buying
Jun 4, 2013 6:23AM
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"And all of this is calling into question hopes a weaker yen would boost Japan's economy."

 

Isn't this the real issue? By purposely suppressing the Yen's value against other currencies, people are supposed to be more attracted to Japan's output. Bernanke is also doing this. Unfortunately, without a stable job and income dynamic worldwide-- nobody is buying enough of anything to move the economy with. So now you have Japan de-valuing a worthless currency and others following to counter. There's NO ECONOMY anywhere so the price of any stock is based completely on falsehoods. As currencies collapse from complete manipulation (an inevitability by dilution), both cash and organized finance and instruments of investment- evaporate (like- POOF). What other possible outcome could there be?

Jun 4, 2013 6:12AM
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I agree, Tony. We are following Japan off the end of the Earth. Japan is a small island reliant on the rest of the world for everything. It prints fake money and comingles it with real money. Instead of the world calling it fake money and retracing from it toward stability and substantiated finance supporting commerce and industry, the G8 opted to join the farce and destroy it's own future. Markets no longer track and price based on the activity/productivity of business, they gamble as business platforms that only follow the financial dynamic... which is false. It's like constantly buying online cooking game time but not any real food, appliances or being near a kitchen. What you perceive real isn't and you will be destroyed by your own misconceptions because you refuse to recognize reality for what it is-- broken.
Jun 3, 2013 7:45PM
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Yeah, I would certainly wait til Gold hits $1600, much better investment then; Sweet Geezus !!

 

Yup nothing to see here, you all just move along; Because we want paying customers.

Jun 4, 2013 6:30AM
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It isn't rocket science... too much in stocks, too much in bonds, too much in metals, too much in real estate... nothing on Main Street and no way to break enterprise free from suppression and legalese. With too many sitting on too much it all stops moving and becomes stagnant. Meanwhile, the people compromised by all of this just create a separate economy and invalidate the controlled one, without transition or conversion allowances. You die broke from stupid greed.
Jun 3, 2013 6:45PM
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I'm a multi-millionaire in Obama dollars.  mmm, mmm, mmm!
Jun 3, 2013 6:35PM
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Shoot the juice to me Bruce,  oops Ben.
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