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Gold vs Bonds

January 26, 2005

In a recent and exceptionally lucid and well researched article by Professor Antal E. Fekete, he postulates a relationship between the speculative behaviour of investors who have a propensity to hoard either Commodities (including gold) on the one hand, or Government Bonds on the other hand. The basic premise is that money flows into bonds and out of commodities during deflationary times, and flows out of bonds and into commodities during inflationary times. (Ref:

His conclusion appears to be that any move away from a gold standard will be followed by an inevitable return to a gold standard at a point in time close to the Kondrat'eff washout phase. i.e. This ebb and flow of funds may be one of the drivers of the Long Wave cycle.

Whilst I have questions flowing from the government's ability to outlaw gold hoarding, and also regarding the adequacy of above ground gold inventories to support global trade and commerce, these are not sufficiently compelling concerns to allow me to dismiss Professor Fekete's conclusions.

With an open mind, and using his cogent logic as a point of departure, I applied it to the charts. The following charts show the gold price divided by the long bond price. Based on Professor Fekete's logic, if money flows out of bonds it should flow into gold, and vice versa, then we should be looking for chart signals in the relationship to point to possible changes in direction of the ebbs and flows.

The first chart below (courtesy shows the daily relationship:

The "gap island reversal" pattern in December evidenced a reversal in gold's superiority at the time, whilst the imminent buy signal in the MACD now shows a potential for the reversal of this relationship once again in favour of gold. Of interest is the "shape" of the two MACD "valleys", with the second one being shallower than the first. My interpretation of this relationship is that the bearish pressure is abating and that an MACD buy signal (in favour of gold) is imminent:

One problem with daily charts is that they tell us nothing about long term trends and more accurately reflect short term trading propensity of market participants.

The weekly chart below is quite strongly in favour of gold. It shows support emerging at the 50 week level, a relatively oversold RSI oscillator, but with some potential further (short term) weakness in the MACD oscillator.

The Point and Figure Chart below is at a critical juncture. The ratio has reached the target downside level based on horizontal count assessment, but the vertical count assessment points to the "possibility" of further downside. Importantly, my own experience is that vertical count targets are typically only valid if they are consistent with the direction of the Primary Trend. i.e. If the downside vertical count target is met, it will imply that the ratio is in a bear trend for gold and/or a bull trend for the bond price. This does not hold up against my "intuitive" benchmark, so I will reject the downside count based on vertical measurements for the moment.

Conversely, if the Primary Trend for gold is "up" then the vertical count target upside count for the ratio is substantially higher at around 444 (depending on the methodology used)

Finally, it has also been my experience that P&F charts drawn to a semi log scale (to reflect percentage movements) lead to more compelling conclusions, and the following 2.5% three box reversal chart shows a strong bull market in the relationship in favour of gold that has been prevailing since 2001; with the recent softness in gold merely facilitating a consolidation of the ratio prior to a further upside break.


If Professor Fekete is correct in his conclusions, then the charts are pointing to a potential for an outbreak of inflation and/or an increase in the level of interest rates. The extent of the consolidation - showing a horizontal count of 8 blocks - points to the potential for an upside break in the ratio in favour of gold of 20% above the 408 level.

Time estimates are not facilitated by P&F charts, and neither can we draw conclusions regarding whether the ratio will rise because the gold price rises or the long bond yields rise - or some combination.

The chart of the long bond rate below does not seem to be anticipating a strong upward move at present, but the yield could rise as high as 5% - or by around 9% from current levels

This implies that there might be a further rise in the gold price - to give rise to a cumulative differential of 20% in the ratio

Does this look possible from the gold chart?

The short answer - following an assessment of the chart below - is "yes". The horizontal count target is 15% above gold's current level of $422.

Overall Conclusion

Professor Fekete's arguments are consistent with the conclusion - drawn from the charts - that the upside potential for gold in the next move is around $485.

Which brings me back to my two questions above, regarding:

  • Potential for Governments to legislate against Gold Hoarding
  • Adequacy of the gold stockpile to support global trade and commerce

I would be interested in his comments

Pure gold is so soft that a strong man can squeeze it and shape it.
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