Gold And The CRB Index by John J. Murphy
John Murphy, the leading proponent of intermarket analysis, closes the current circle of tradable interrelationships by examining how gold and the CRB index interact.
The gold market plays a key role in intermarket analysis. Last time, I discussed gold's tendency to trade
in the opposite direction of the U.S. dollar. Falling U.S. interest rates, which are usually associated with a
weak dollar, at some point begin to reawaken inflation pressures. One of the first places that inflation
begins to manifest itself is in a rising gold market. Because of gold's historical link to the dollar, a weak
dollar will usually affect gold prices first. A rising gold market is an early signal that commodity prices in
general may start to strengthen, due to gold's history as a leading indicator of the CRB index at important
tops and bottoms.
During the past 12 years, the CRB Futures Price Index of 21 commodities has seen three major turns. The
November 1980 peak in the CRB index marked the end of the inflationary spiral of the 1970s. Gold hit its
all-time high in January 1980, peaking 10 months before the CRB index. The CRB troughed in mid-1986
and then rallied 35% during the ensuing two years. Gold hit its low point in February 1985, 16 months
before the CRB index. Figure 1 shows the third major turn in the CRB index, which turned back down in
mid-1988. Point A in Figure 1 shows that gold peaked in December 1987, leading the CRB peak by six
months . Gold led those three major turns in the commodity price level with an average lead time of 10
months. That being the case, gold can provide some useful clues to the inflationary threat presented by
the CRB index.