Gold vs. Bonds-the tide is turning

What has been happening in the other asset classes? Look at the Gold and bond relationship over the last two months, markets participants have seen them go up or down in tandem. Since Aug., the ‘yellow metal’ has risen by around 10% and the Treasury’s 10-year yield, which moves inversely with Treasury prices, has fallen by nearly -15%. It is only this week that we have seen some decoupling of sorts.

There are a number of reasons why Gold has been well sought after, already managing to record an all time high this week. The easiest answer can be attributed to the weakness of the USD and the markets disdain for holding any of that currency. Secondly, by holding a hard asset like Gold, its strength is discounting higher inflation in the coming months and years. With the amount of liquidity that Cbanks have pumped into the financial system to keep it afloat, inflation or hyperinflation will eventually occur.

That been said, why have Treasury prices been strong? In either case if the Fed raised interest rates to combat inflation and provide support for the USD, yields can only go one way and that’s back up. With the Fed’s buy-backs about to cease, dealers will once again have more products to contend with. And we all know that dealers hate paying up for them!

Perhaps we are underestimating Bond dealers who are obviously discounting a weaker than expected economy and deflation. One of these scenarios has to give as they are not sustainable. With the US 10-year bond backing up 16bp this week, the FI asset class looks to be the loser. Equities continue to outperform, earnings are surprising (Intel, JPM), if they believed that deflation and economic vulnerability was persistent they would not be following commodity prices. Gold is performing well in an inflation environment. It would just perform as well in a deflation environment. Cash and especially Gold is always King!

On the Big picture front, Treasury buybacks are almost over. MBS buybacks have about $250b to go. The US Treasury still had to raise $1.8t per year (more pressure on the curve). The USD is at 14 month low. Analysts foresee 4% 10-yr notes before the year-end and 4.5% by middle of next year.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Dean Popplewell

Dean Popplewell

Vice-President of Market Analysis at MarketPulse
Dean Popplewell has nearly two decades of experience trading currencies and fixed income instruments. He has a deep understanding of market fundamentals and the impact of global events on capital markets. He is respected among professional traders for his skilled analysis and career history as global head of trading for firms such as Scotia Capital and BMO Nesbitt Burns. Since joining OANDA in 2006, Dean has played an instrumental role in driving awareness of the forex market as an emerging asset class for retail investors, as well as providing expert counsel to a number of internal teams on how to best serve clients and industry stakeholders.
Dean Popplewell