JOHN AUTHERS THE SHORT VIEW MARKET
JOHN AUTHERS THE SHORT VIEW MARKET
By John Authers
Published: April 12 2006 03:00 | Last updated: April 12 2006 03:00. Copyright by The Financial Times
Landmarks are in vogue for inflation-sensitive markets. The gold price passed $600 an ounce yesterday; it is now at a 25-year high. Meanwhile the yield on the 10-year US Treasury bond is hovering just below the 5 per cent level, at 4.94 per cent, near a four-year high.
However, the routes the gold and bond markets have taken to their current levels have been very different. Gold has been booming for a while - which would classically be taken as an indicator of severe inflation fears. Meanwhile, long-dated US Treasury yields were stubbornly immune to a two-year campaign of Federal Reserve tightening before finally slipping in the past few weeks - suggesting bond investors were not worried.
Alan Greenspan, the former Fed chairman, called this a conundrum. It appears, as Philip Coggan wrote here last week, the conundrum is now being solved, but the disparity between gold and treasury bonds remains puzzling.
Much of the recent uptick in bond yields can be attributed to rising inflation expectations. The bond market's implied expected rate of US inflation (obtained by subtracting the yield on 10-year Treasury Inflation-Protected Securities, or Tips, from the conventional 10-year bond yield) is 2.58 per cent, up from a recent low of 2.3 per cent late December, when hopes were high for an imminent Fed easing. But the gold market appears much more bearish, galloping up 20 per cent over the same period.
If the gold market is right - and gold truly is the world's reserve currency - the world is not as healthy as it appears.
For example, in nominal terms, the S&P 500 is only 15.6 per cent cheaper than at its peak in early 2000. Not in gold terms, however. Gold was selling at $286 an ounce the day the S&P peaked. So you notionally now need 60 per cent less gold to buy the S&P.
Why the divergence? Specific demand factors, primarily in Asia, arguably push the two markets in different directions. Bond yields are pushed down by demand from Asian central banks, while the demand for gold from newly affluent Asians pushes up the gold price.
A simpler explanation may be better - that gold is in the grip of a speculative bubble.
By John Authers
Published: April 12 2006 03:00 | Last updated: April 12 2006 03:00. Copyright by The Financial Times
Landmarks are in vogue for inflation-sensitive markets. The gold price passed $600 an ounce yesterday; it is now at a 25-year high. Meanwhile the yield on the 10-year US Treasury bond is hovering just below the 5 per cent level, at 4.94 per cent, near a four-year high.
However, the routes the gold and bond markets have taken to their current levels have been very different. Gold has been booming for a while - which would classically be taken as an indicator of severe inflation fears. Meanwhile, long-dated US Treasury yields were stubbornly immune to a two-year campaign of Federal Reserve tightening before finally slipping in the past few weeks - suggesting bond investors were not worried.
Alan Greenspan, the former Fed chairman, called this a conundrum. It appears, as Philip Coggan wrote here last week, the conundrum is now being solved, but the disparity between gold and treasury bonds remains puzzling.
Much of the recent uptick in bond yields can be attributed to rising inflation expectations. The bond market's implied expected rate of US inflation (obtained by subtracting the yield on 10-year Treasury Inflation-Protected Securities, or Tips, from the conventional 10-year bond yield) is 2.58 per cent, up from a recent low of 2.3 per cent late December, when hopes were high for an imminent Fed easing. But the gold market appears much more bearish, galloping up 20 per cent over the same period.
If the gold market is right - and gold truly is the world's reserve currency - the world is not as healthy as it appears.
For example, in nominal terms, the S&P 500 is only 15.6 per cent cheaper than at its peak in early 2000. Not in gold terms, however. Gold was selling at $286 an ounce the day the S&P peaked. So you notionally now need 60 per cent less gold to buy the S&P.
Why the divergence? Specific demand factors, primarily in Asia, arguably push the two markets in different directions. Bond yields are pushed down by demand from Asian central banks, while the demand for gold from newly affluent Asians pushes up the gold price.
A simpler explanation may be better - that gold is in the grip of a speculative bubble.
posted by Carlos T Mock at 10:22 AM
0 Comments:
Post a Comment
<< Home