Treasuries Were Good but Gold Has Been Better

Includes: CPI, GBS, GLD, LTPZ
by: Eoin Treacy

Bond yields collapsed over the last few months as deflationary fears stalked the markets and sovereign bonds were held up as the only investment worth participating in. A subscriber sent me an email last week asking how to interpret this chart: It shows gold outperforming US Treasury yields over a prolonged period of time.

click to enlarge images

Gold / US Tresury yields

I thought it was a bit unrepresentative, since gold had underperformed for decades so I created this log scale chart to illustrate the same data:

Log scale of Gold / Treasury Yields

It shows what we might intuitively expect to see with gold outperforming in the 1970s, peaking in the early 1980s, underperforming for nearly 20-years and outperforming again over the last decade. However, this chart takes now account of the total return from bonds since they pay a coupon that is not accounted for in the raw yield, so I created this chart of Gold / the Merrill Lynch 10-year Treasury Total Return Index

Gold / Merrill Lynch 10-year Treasury Total Return Index

Now this is an interesting chart. It shows what we would expect with bonds outperforming in the disinflationary 1980s and 1990s. In the last decade, following two stock market crashes and a widening gulf between deflationists and inflationists gold continues to outperform and suggests investors might fear deflation but are positioning for inflation.

I trade gold from time to time. I don't currently have a position because I failed to buy when it was testing its 200-day moving average a few months ago and I waiting to see if it can break to new highs before buying now.

Disclosure: Author is waiting to buy the breakout

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