Magazine article Modern Trader

Is the Future of Bonds Carved in Gold?

Magazine article Modern Trader

Is the Future of Bonds Carved in Gold?

Article excerpt

Technical analysis of the Treasury bond market provides a good tool for predicting prices. When the T-bond, Knight-Ridder Commodity Research Bureau (CRB) index and gold markets are analyzed together, the tool becomes even better.

Bonds, obviously, are very much affected by the state of the economy. An expanding economy makes interest rates rise due to fears of higher inflation. The economy then tends to be choked off by higher interest rates and slows down. When the economy is contracting, interest rates fall as inflation fears and credit demands dissipate.

Intermarket technical analysis of the bond market reveals several correlations. The best way to forecast the bond market is to predict inflation. An excellent predictor of inflation is the CRB, an index of 21 commodities ranging from lumber to livestock, grains to gold and coffee to copper.

The CRB can give valuable timing signals as to when there will be a major change in bond prices. Historical data shows the CRB and bond prices are inversely correlated: Lows in the CRB usually lead to highs in the bond market, and CRB highs lead to bond market lows.

Of the eight major trend changes in both the CRB and bond markets between April 1983 and November 1994, the CRB has changed trends between zero and eight months before the bond market did, for an average of four months. The CRB, therefore, can be used as a leading indicator of bond prices.

Even though the CRB already is a leading indicator of bonds, there also exists a leading indicator of the CRB - gold. Because the CRB contains some coincident economic indicators, such as the industrial metal copper, it can lag behind gold. In the eight major CRB trend reversals, gold led the peaks and troughs by between -1 and 17 months, for an average of 7.375 months.

These historical patterns are emerging again in the current commodity price cycle. …

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