Of Gold And Bonds,
Gold Is The Leader
by Alex Saitta
Does gold lead the bond market, or is it the other way
Previously, we uncovered strong
coincidental relationships between
gold and the dollar, inflation,
bonds and the CRB index.
As bond traders, though, we are
most interested in the relationship
between gold and the bond
market. Looking at the past 20
years of data (Figure 1), we noticed
gold’s reversals have led bond yield reversals. Looking
beyond the peaks and valleys and considering all the data,
does gold have a tendency to lead the bond market?
To answer this question, we applied basic statistical analysis
to measure relationships between two series of data.
Correlation analysis measures the degree of association between
all the data points of two series. The product of this
mathematical comparison is referred to as the correlation
coefficient. Correlation coefficients range from -1.0 to +1.0
and identify the direction as well as the strength of a relationship
between the two series being compared.
For example, a coefficient of +1.0 represents a perfect
positive relationship. When one variable rises, the other rises in lockstep. When one falls, the other falls in lockstep. A
coefficient between zero and less than +1.0 is a nonperfect
positive relationship. When one variable rises, the other
usually rises somewhat. When one falls, the other usually