Is Stability In Japanese Bonds Signalling Gold's Next Leg Higher?

Tyler Durden's picture

While intraday ranges on Japanese government bonds (JGB) remain relatively high to the last ten years average volatility, the market has begun to deal better with the unprecedented flows from the BoJ day after day. This in turn has compressed the hedges in JGBs (implied volatility has fallen). This has occurred for two reasons: first, Japanese banks (after front-running the BoJ to all-time record low yields) have likely reduced duration (and thus the need for more protection); and second, the initial fear fear has worn off (as we see again and again in volatility flares) and with it the need for preemptive collateral satisfying asset liquidations.

As we noted here, there is a very explicit link between the volatility (or risk) associated with one of the world's lowest yield and supposedly risk-free sovereign bond complexes and the need for liquidity (or cash over gold or commodities). The last two weeks has seen JGB bond volatility drop and gold rally as the correlation (which appears to have strong causal links) continues; and suggests notably more upside for Gold (especially as CoT data shows net longs remain extremely low).

In short: screaming JGB volatility (among other things) pushed gold much lower. How much higher will it pull it back now as the mean reversion reasserts itself?


JGB Implied Volatility (inverted) versus Gold price - the need for liquidity



Chart: Bloomberg

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bank guy in Brussels's picture

Latest fire and brimstone from the great Jim Willie, speaking about how gold's great comeback will be driven by the nations of the East, making gold a trade settlement currency replacing the US dollar, with the side effect of the USA becoming a third-world country, much of its citizens wealth vapourised. Highlights of his new article:

« The national socialists are back in force after a 70-year hiatus, with far more toys and devices. ... The United States and its fascist allies are not in control. They will not find a path to retain or regain control. They have no solutions. ... The ultimate consequence will be the United States losing its privileged global reserve currency USDollar, suffering imported price inflation, contending with supply shortages, and entering chaos ... complete with a vast police state and utter brutality. ...

As the Bail-In features wipe out private accounts ... much of the US private wealth will vanish in the debt writedown and financial firm failures, one decade after phony home equity wealth vanished in a similar manner ...

The foundation of the entire Western banking system is a deep fraud. Worse, the world is able to observe how no prosecution, no justice, and no remedy will be pursued for banker crimes. The LIBOR and derivative frauds are the next to final exposure to happen. ... It is the final bank fraud to reveal how over 40,000 metric tons of gold have been stolen, in need of replacement in the open market. ... The missing gold from supposedly guarded sacred accounts exceeds the central bank holdings in reserve on a global basis ...

The COMEX will soon be totally ignored, its price considered a meaningless sideshow that only lacks criminal prosecution ... [Paper] gold and USTBonds aint a market. Their so-called official trading arenas are empty rooms with USGovt and USFed devices filling the empty space, creating a phony price. The false Gold price has no real supply. The false Bond price has no real demand. The claimed price is not where Supply meets Demand to clear the table on the market. Therefore the claimed price is not the real price ...

The reaction in consequence by Eastern nations is to build gold reserves. They realize the United States, the Canadians, and the British are liars on almost all matters of gold accounting in reserves. The USDollar, the Canadian Dollar, and the British Pound have no collateral. Neither does the Euro currency. ... The distrust of the vile New York and London bankers has reached high pitch on the global stage ...

Numerous reports hit my desk of foreign corporations and even government ministries not returning phone calls in a grand global shun of US offices. They object to the arrogance and practiced hegemony on financial matters in a queer global kingdom manifestation. The USGovt acts like a global emperor, and foreign nations resent it. ...  »

fonzannoon's picture

Foreigners are bidding up US treasuries like they are going out of style.

Pinto Currency's picture


The gold market trades 100 million oz. worldwide each and every day.

Hard to believe that the JGB market vol should be a key driver.

Though if the Japanese pension funds run into physical, it will contribute to the current worldwide run on physical gold and moderate any pull-back.

The Phu's picture

We (America) must not feel the need to defend our currency anymore.  We can't even keep the carriers out of home ports to defend the petrodollar and US military-industrial complex.  In all of my years of watching, I do not recall (not saying it hasn't happened, I just don't recall) one having ONE carrier out at sea.  All others are at home being sequestered or something.


flacon's picture

Paper gold is dead. Duffy said so himself. Therefore the [paper] gold "price" should target zero as people sell their futures contracts and just buy "the real deal" on the open market. I really hope the [paper] gold "price" does NOT recover from here. 

Herd Redirection Committee's picture

I just want to take this moment to say, I really REALLY don't see mines being nationalized.  What makes the state think they can operate a mine?  Plus the former owners would surely sabotage the hell out of the mine, if it came to that.   The repercussions are just too great.  Its too blatantly fascist an act for even the avg. sheeple to put up with.

hangemhigh's picture

@ HR  3516271

 I really REALLY don't see mines being nationalized. What makes the state think they can operate a mine?

no need to nationalize....'take under' is the operative MO.....abx is cartel agggregator.................

slaughterer's picture

Nationalizing mines in the US = lots of shovel-ready jobs for the great leader to send his serfs to.  PLus control of supply of a major financial weapon to fiat.

flyingpigg's picture

Similar statements were made when Chavez replaced PdVSA management by his political friends. Despite their absolute lack of technical expertise, Venezuelan oil production and refining didn't stop (it didn't improve either and operations are far from efficient but it illustrates my point). The guys who have to get the gold out of the dirt will continue to do so because they can't afford to lose their jobs. Mines are not nationalized because the government thinks they can oprate a mine, but because the government sees the revenues and they think they can confiscate that value.

Look at Argentina confiscating YPF this year. I don't see the difference between nationalizing oil companies and mines. If gold prices go to the moon, I do expect mines will be nationalized.

mumbo.jumbo's picture

you used the word "we" in an incromprehensible way. put one dollar, err, one gg in the jar!

Spigot's picture

"The gold PAPER market trades 100 million oz. worldwide each and every day."

There, fixed for you.

Pinto Currency's picture

Thx - and make it "each and every trading day".


The London Bullion Market trades ~ 70 M oz. per day.  Some of this is allocated gold and the other is 'pooled' (1% backed) gold contracts.

Redneck Hippy's picture

Of all the stupid theories about gold, the supposed link between Japanese bond volume and gold price has got to be the stupidest.  

Since nobody sane would want Japanese bonds other than the BOJ, gold aficionados can just wait till the BOJ stops QE, bond vol. will drop to zero, and gold will go to the moon.  Except that the BOJ will not stop QE ever.

Pinto Currency's picture

There are a lot of the $3.2 trillion of Japanese pension funds invested in Japanese bonds; the question is can their entry into the rapidly trading gold market make a difference.

If they take physical, yes but if they simply ramp the paper trading volume, the market will adapt to contain their impact.

hangemhigh's picture

@redneck hippy    3516048

Of all the stupid theories about gold, the supposed link between Japanese bond volume and gold price has got to be the stupidest.

you are missing the opaque, non-transparent link that is the collateral required by repo markets.........when central bank buying exhausts the 'traditional ponzi based fiat liquidity' that is normally available, gold  then functions as the universal solvent................. 

Redneck Hippy's picture

Of all the stupid theories about gold, the supposed link between Japanese bond volume and gold price has got to be the stupidest.  

Since nobody sane would want Japanese bonds other than the BOJ, gold aficionados can just wait till the BOJ stops QE, bond vol. will drop to zero, and gold will go to the moon.  Except that the BOJ will not stop QE ever.

ISEEIT's picture

WTF do you think "Forward" in tyrant speak actually means?

United States reduced to third world status.


Already happened.

ebworthen's picture

Oh hell, I was hoping for another price dip so I could buy some more (Gold, that is).

Manthong's picture

you might get it..

what happens to a paper scam that nobody wants anymore?

at some point the link to the coin dealer's price will snap and the elastic reaction of years of suppression will be awesome.


news printer's picture
Moody's Downgrades Slovenia's Sovereign Rating to Ba1 from Baa2, Outlook Negative

sitenine's picture

Isn't the moon made out of Gold? Or is that cheese?.. Meh. Either way, PRINT TO THE MOON!

El Oregonian's picture

Hey I LOVE mountain climbing. I'd prefer going straight up but hey, it is sometimes wise to go down in order to secure a better path up. Mt. Everest here we come!

Spitzer's picture

Obviously this correlation has something to do with the inner workings of the G10 to manage exchange rates.

DoChenRollingBearing's picture

I would like to know more about the presumed causality between the GB bond vol drop and the gold rally and its correlation...

Long_Xau's picture

I think the central bankers are now seeing the liquidity of the gold market and the apparent "devaluation" seen on the market as yet another belligerent in the currency war that they want to outdo. From that point of view, they will probably want to destroy the cartelized gold markets (COMEX and LBMA), which are the ones many institutions use as an alternative to begging central banks for "free" "money".

impermanence's picture

I truly wish I had an unlimited amount of gold to give to everybody who seems completely obsessed by its apparent value. 

This soap opera is getting really old.

dr.charlemagne's picture

Yup. in fact its 5-7,000 years old, unlike the unbacked USD which is about 40. How much buying power has the USD lost in since the federal reserve act? 96%? 98%? At that run rate what will its value be in 5,000 years? How bout gold? 

BigInJapan's picture

I believe history will reveal that for the past 3-5 years, the Bank of Japan has been behind a large part of the "Cash for Gold" schemes one sees here in Japan.

The last data I was able to find, from 2011, showed that only an estimated 50% of said gold was exported, mostly to Hong Kong. At that time, I didn't know one single person in Japan buying gold, and at some hundreds of tons annualy, who was buying?

If China is preparing for a gold backed currency, Japan will be right there with them. 


hangemhigh's picture

@BIJ   3516270

If China is preparing for a gold backed currency, Japan will be right there with them.

they'll be on the same team alright.......doing an asean stimulus based home boy infrastructure build out in the wretched dirt eating hood of the elvis impersonator wannabe.......not to be outdone, those damn yankees will cut a deal with all of them hottie cubanas to get the same stimulus effect.....anti-cold war redux....... 

hmmtellmemore's picture

Would anyone mind telling me how I monitor JGB volume in a daily chart similar to the one above?  The connection in that chart is pretty stunning.

RaceToTheBottom's picture

I think all those Japanese houswives will soon be buying gold/silver.  I will further bet they keep the metals in their KOI ponds....

Herd Redirection Committee's picture

VOLATILITY DOES NOT = Volume, people

Gold is not tracking the volume of Yen bonds, Tyler is showing the link with yen bond volatility and gold price...

outragefromitaly's picture

At this hour we can report that 80% of the criminal German Deutsche Bank's $73 trillion of worthless derivatives are currently parked in the Central Bank of Japan in cross-collateralized undermargined naked short positions in the Japanese yen foreign currency.