The US dollar bulls are out in full force this morning.

The herd is stampeding anything that might lie in their way.

The media is ascribing this morning’s US dollar strength to the Republican victories in last night’s mid term elections. Although I acknowledge that is a factor, I think the Yen’s weakness, which is dragging all the other currencies lower, is the driving force behind this latest US dollar rally. Over the past few days, every time it seemed like the Yen might be ready to pause from this massive decline, the rally was measured in minutes before a fresh new wave of sell orders hit the market. It is my opinion that some really large long term players are putting this trade on in size. They are still not finished. In the mean time, the US dollar is rallying hard and in the process, crushing a lot of commodity trades.

This morning’s biggest casualty is the precious metals. Gold and silver have been taken out to the wood shed and shot.

The longer term chart looks terrible, with gold breaking down and proving once and for all that there really is no such things as triple bottoms.

The Market Gods, in their typical devious wickedness, rallied the price of gold just enough to fool investors into thinking that maybe triple bottoms were real after all. When everyone was sucked in (me included), the Gods proceeded to send the price of gold crashing through the supposed “triple bottom” level. The next time I think that a triple bottom might hold, I am going to cook myself a steaming plate of unicorn meat and remind myself that there are no such things as triple bottoms.

Yeah, yeah, we all know that the Market Gods love to inflict as much pain on as many market participants as possible, but where do we go from here?

I am not sure where the precious metals market might bottom. Right now it is on a one way trip lower and any attempt to call the bottom usually evokes howling cackles of laughter from the Market Gods.

I find it ironic that the recent “all in” play by the Bank of Japan has set off this latest rout in gold. Stepping back it is hard to imagine how a Central Bank dramatically increasing their quantitative easing is gold bearish. The Bank of Japan’s actions are pushing down real yields (gold positive) and also dramatically increasing the chance of an inflationary upward spiral (again gold positive).

I remember someone once asked the legendary hedge fund trader Kyle Bass how the average Joe could play the coming Japanese financial disaster. Kyle responded that they should buy gold in Yen terms.

When you examine the chart of gold priced in Yen, the picture is dramatically different.

Gold is not hitting 5 year lows as is the case for gold price in US dollars, but instead gold priced in Yen is slowly increasing. This makes sense as you simply don’t print with reckless abandon and have a collapsing gold price.

I think the gold rout is being driven by the US dollar strength. But the problem is that the rally in the US dollar might be just starting. Although the trade is crowded, it might be one of those times where the simple obvious trade is the right trade.

But I actually think that the gold priced in Yen is hanging in there remarkably well. I am not going to buy gold priced in US dollars anytime soon, but I put on a tiny little starter position of gold priced in Yen yesterday.

My suspicion is that either the Japanese are going to lose control of the Yen to the downside (at which point gold should outperform as inflation will take off), or that the US dollar rally will pause and give gold a chance to breathe (and hopefully outperform the Yen correction).

Either way, I think that the Japanese have embarked down a precarious road and that gold priced in Yen is a good little insurance position to own.

The “currency VIX”

I continue to pound the table on the fact that you need to own FX volatility. It has recently increased, but don’t let anyone talk you out of the position. It is still cheap.

Yesterday’s revelations about the ECB mutiny just highlight the risks in the FX market. I will talk about it that more tomorrow, but for the mean time – stay safe and trade from the long side of the FX volatility market.