V.17:5 (246-248): Of Gold And Bonds, Gold Is The Leader by Alex Saitta

Of Gold And Bonds, Gold Is The Leader by Alex Saitta

Does gold lead the bond market, or is it the other way around?

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 falls somewhat.