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Strategies & Market Trends : YellowLegalPad

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From: John McCarthy	5/15/2006 4:03:10 PM
	of 1182

Gold Prices and Long Term Interest Rates ... Gold is getting killed today AND the long term bond is DOWN meaning that its yield is up. Simply put, this status cannot remain for long. As an investor what I want to do is dumb things down to simple rules so that I can understand in advance which way a certain commodity should be going. In this case - I want to understand irrespective of the current moment, euphora, etc. which way gold is going. After looking around on google for correlations, the best correlation I could find was that there is a correlation between gold prices and an INCREASE in long term interest rates. HOWEVER, I could not find any of the links I had originally found so I will use a NEW ONE that I just bumped into today .... its a long article ... but here is its bottom line ... <<<<<<<<<<<<< We often talk about the tendency of gold stocks to move in the same direction as the yield spread (the yield on the 30-year T-Bond minus the yield on the 13-week T-Bill). The idea that the yield spread could be important for gold stocks first occurred to us when we were reviewing what took place during the 1985-1987 period. Specifically, in trying to figure out why the prices of gold stocks, as measured by the XAU, fell between March of 1985 and July of 1986 even though the gold price rose by around 20% over this period, we came across the relationship between gold stocks and the yield spread. <<<<<<<<<<<<< The above is "a bunch too much" to read so lets translate it to the following ..... (a) Get the rate of the 30 year Tres bond (b) Get the rate of the 13 week Tres bill (c) Subtract (a) - (b) (d) If - over time - (c) keeps INCREASING then gold is heading higher .... Its that simple ..... Here is a link to the article ... gold-eagle.com And here is a link to the increase in 10 year (not 30 year) Tres bonds .... please notice that they are constantly INCREASING ... however .... I am guessing that the 13 week Tres bill has also increased ..... so I don't know if (a) - (b) is increasing over time .... However, I EXPECT the long term rate to CONTINUE to increase because of perceived inflation fears ... and therefore I EXPECT (a) - (b) to increase over time ..... which means ... GOLD MUST increase if this (a) - (b) spread is increasing ... here are the prices (yields) of the 10 Year Tres Notes as per Yahoo .... finance.yahoo.com

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