---

INTERMARKET ANALYSIS 

---

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 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.

FIGURE 1: T-BONDS VS. GOLD 1989, WEEKLY. Here, you can see the inverse relationship between T-bonds and gold on a weekly basis.

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:

1 We arbitrarily defined a significant price change of gold to be more than $20 above or below the starting price.

2 We recorded the price of gold on the starting day of the test period. Then we tracked gold, moving forward one day at a time. We ended the first test period the day that gold's closing price rose or fell more than $20 above or below the starting price. That day, we recorded the price change of gold and the change of the price of the T-bond futures contract between the starting day and the ending day of the period.

Excerpted from an article originally published in the February 1999 issue of Technical Analysis of STOCKS & COMMODITIES magazine. All rights reserved. © Copyright 1999, Technical Analysis, Inc.