Bonds in a Bubble?—Gold/Bonds Ratio

Technical Scoop (01/12/2009)
Bonds in a bubble? Sure, fear has generated the flight to safety, particularly at the short end of the yield curve where rates have fallen virtually to zero. But for long-term bonds, despite the nice run up in prices (fall in yields) over the past few months, the party is getting near the end. All signs point to higher interest rates further out.

This brings us to the gold/bonds ratio. Since the bottom in gold back in 2001 the upward march in prices has favored gold over bonds. Since the ratio peaked in July 2008, the past several months have favored bonds over gold. But the past few weeks has seen a rebound in the ratio once again in favor of gold.

While it is clearly possible that the long-term uptrend line (currently near 5.000) could be tested in the weeks ahead, if that were to occur, then the long-term uptrend in favor of gold would resume. Failure to take out the lows seen in 2006 would, however, be quite bullish. Gold has been the top-performing asset class over the past decade and we have no reason to suspect it is about to give up that mantle. Indeed, with the risks to bonds outlined above, owning gold becomes even more imperative.

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