The study below about the gold/Treasury bond ratio was of interest to me and I thought it might be to you as well. The author, Kevin Klombies, is suggesting the possibility that gold is at a multi-year high. Kevin is using the ratio between gold and U.S Treasuries to form his conclusion. I find the study credible because of the constant relationship of two globally traded items – gold and U.S. Treasuries.

Gold and U.S. Treasury bonds are well traded, difficult to manipulate for long time periods, and have a long history of being interrelated. As interest rates rise and the dollar strengthens, gold can be expected to decline. I guess the big question is: when will interest rates begin to rise in the U.S.?

As readers of the LOTM Newsletter know, LOTM placed a short sale position in gold earlier in the year. We were stopped out of the trade with a tiny profit.

One conundrum to consider is the question – with oil rising, the Middle East going up in revolution and the U.S. Dollar weakening, why isn’t gold exploding higher? Perhaps higher gold prices are coming. Certainly, the trend in gold is up, but the rise seems rather muted in light of world events. Our guess is that the hot stock market is beginning to drain attention and money away from gold. Our position now is neutral with LOTM waiting for the price of gold to break down before shorting again. We do want to stalk this trade for the possibility of a big downward move.

Notice the CMF (Chaikin Money Flow) in the bottom third of the chart below for GLD. It is suggesting that there is a strong out flow from GLD even as the price of GLD goes up.

There is a Wall Street saying, started by Joseph Granville that goes something like this –

When water begins to drain out of the bathtub, you don’t see any movement on the surface of the water, but as the tub nears completion of the draining process, you hear the sucking sound and see the swirling water disappearing –  too late to save much water.

So it is with stocks and money. That is why we watch for indicators other than the price action of the stock alone to give us some clues of what might be coming.

Equity/Bond Markets by Kevin Klombies 3/25/2011

We are not sure whether this is an inspired piece of thinking, or a simple fixation on a potential coincidence but… we thought we would take another run at it just in case.

It has to do with the month of March in the ‘1’ year of a new decade. As premises go this one may be a bit of a stretch.

The chart just below shows the ratio between gold prices and the price of the U.S. 30-year T-Bond futures. The argument in yesterday’s issue was that the price of gold relative to long-term bonds peaked in 1980, declined for 20 years, and then rose for the next ten years back to the original peak. In other words, as bond prices trended upwards for the past 30 years gold prices weakened on a relative basis for 20 years and then shot back up to the original extreme through the last decade.

In any event, the low point for the ratio was reached in March of 2001. After two decades of declining, gold prices fell to a major – and perhaps generational – relative strength bottom in March of 2001.

Fast forward ten years and we are now in the month of March in 2011.

Next, we show the same ratio to make the point that the gold/TBond ratio has risen to its highest level since 1980 when it spent a mere four trading days north of 12:1 before collapsing lower.

The offset to the peak in the gold/TBonds ratio may well be the ratio between the Nikkei 225 Index and Canada’s S&P/TSX Composite Index. The chart below right shows that the Nikkei made a post-earthquake low relative to Canadian stocks this month. The arguments are that IF the gold/TBond ratio is at a peak- perhaps for years or even decades- then the Nikkei/TSX ratio could potentially have made a generational bottom.

About the Author

Kevin Klombies is a prolific writer and market analyst. After graduating in 1980 from the University of Saskatchewan with a Bachelor of Commerce degree (Honors) in Finance/Economics, he was a broker for about 16 years for Wood Gundy Inc. /CIBC Wood Gundy (changed name around 1990) Private Client Division.