V.17:2 (80-83): Treasury Bonds And Gold by Alex Saitta

Treasury Bonds And Gold

by Alex Saitta

Intermarket analysis, the comparison of price relationships between two different markets, is a valuable tool for traders and investors. Regular news reports often account for one market’s trend for the day as reacting to the change in another. Interest rates and gold have had such a relationship to keep an eye on over the years, but the gold market has been prices fall because bond participants fear signs of inflation. Using that logic, when gold falls significantly, it is a sign that inflation is lessening, so bonds rise at that time (Figures 1 and 2). We tested this conventional wisdom using a four-step approach: low-key of late. With that in mind, has the Treasury bond versus gold relationship held?

Gold has not been as volatile of late as it was in the late 1970s and early 1980s, while the Treasury bond market has had a number of significant rallies and declines. This has not always been the case. There was a time when analysts pointed toward one market’s movements as the driving source for the activity in the other. The low volatility in the gold market has led some analysts to opine that the relationship between gold and the T-bond market has broken down and no longer exists. Upon close inspection, however, you’ll see that the relationship between the changes in the price of gold and the T-bond futures remains strong.

CONVENTIONS

Conventional thinking holds that when the price of gold rises significantly, it indicates that inflation has ticked up, so bond prices fall because bond participants fear signs of inflation. Using that logic, when gold falls significantly, it is a sign that inflation is lessening, so bonds rise at that time (Figures 1 and 2). We tested this conventional wisdom using a four-step approach: