Treasury, Gold Relationship: One Question, One Answer, One Chart

Why are bonds going up at the same time that gold is climbing? Real yields are the highest that they have been since the late 1980’s and the third highest in the last 100 years, investors expecting slow to negative inflation and growth are buying and will keep buying as they grasp for yield. (click on chart to enlarge)

10-Year T-Note Real Yield

Why has the SP500 continued higher even when earnings have been weak and unsustainable and demand has been virtually non-existent? There are several contributing factors such as the oversold condition, sentiment, etc. but our favorite one is that the Government is debasing our currency and in the process it is driving asset prices but not their actual values higher. After all, if your investment in the SP500 is up but the actual value of your dollar is equally low then have you actually made any money? (click on chart to enlarge)

SP500 and US Dollar Index

If we are in a deflationary environment then why is gold climbing higher? No one wants to hold the US Dollar, so instead of being an inflation/deflation play the current move of gold is based more on the devaluation of the US Dollar than anything else-It’s a currency trade. (click on chart to enlarge)

GLD-Gold ETF and US Dollar Index

If housing is cheap, interest rates are low, and everyone wants to trade their US Dollars for other assets than why aren’t housing sales going through the roof? While your mortgage broker may be calling and saying that rates are at or close to all time lows, the reality is that real rates are at their highest levels since 1987, cheap money my #%$. (click on chart to enlarge)

Real 30-Year Fixed Mortgage Rates

If demand is so weak than why has oil been so strong? Once again it gets back to not wanting to hold US Dollars, when the USD bounces, oil will likely get hit hard. (click on chart to enlarge)

West Texas Crude Oil and US Dollar Index

Disclaimer: We are long some GLD-Gold ETFs

Comments

[Roger Knights:]

"Why has the SP500 continued higher ...? ... The Government is debasing our currency and in the process it is driving asset prices but not their actual values higher."

The matchup between the charts is uncanny, down to the weekly level or better. (Now let's see if the market drops tomorrow on the dollar's bounce.)

"No one wants to hold the US Dollar, so instead of being an inflation/deflation play the current move of gold is based more on the devaluation of the US Dollar than anything else-It’s a currency trade."

Bingo!

Oct 09 04:14 AM

[Roger Knights:]

PS: This is what Marc Faber has been saying also, in a slightly different way: the worse the economy, the better the NYSE, because more money will be printed. Now that there's a cynical reason to be bullish, maybe I'll become a convert.

Oct 09 04:26 AM

[Roger Knights:]

PPS: Why wasn't this article given an Editor's Pick?

Oct 09 04:31 AM

[User 395644:]

I believe the term for this is 'money illusion'

Oct 09 09:01 AM

[cyclingscholar:]

Nice article, tieing disparate events into a common them.

but be careful....six months of inverse correlation between $, SP500, oil, bonds and/or gold does not a trend make. I can self-select many six months intervals to prove that point. Throughout 2007 early 2008 the dollar AND the SP500 fell. The dollar has continued weak but oil prices have stalled for months...are you forecasting an upward breakout in oil prices? Then say so.

Oct 09 03:15 PM

[elwind45:]

I suspect that redemptions are about to change the rallies outlook. Selling stocks to raise dollars. It is lonely shorting the banks. I believe (hope) after Goldman's earnings bam down down....

Oct 10 04:33 AM

[JeffDB:]

On Oct 09 03:15 PM cyclingscholar wrote:

> The dollar has continued weak but oil prices have stalled for months...are you forecasting an upward breakout in oil prices? Then say so. >
---

On the other hand, oil & gas prices typically head down this time of year. This year that isn't happening (yet?) despite the inventories above normal levels.

Oct 10 06:31 PM

[Kinetics63:]

How can the 'Real Yield' on treasuries be climbing when the value of the dollar is falling? You need to use the same logic you use for the stock market.

Oct 11 03:12 AM