Short view By Philip Coggan - Financial Times
Short view By Philip Coggan
Published: May 11 2006 03:00 | Last updated: May 11 2006 03:00. Copyright by The Financial Times
Gold's surge past $700 raises again the question that has dogged the markets over the past year or so: is bullion's rise a signal that investors are worried about inflationary pressures and a dollar collapse or is it simply a symptom of speculative enthusiasm?
The answer has enormous implications for investors. If gold is an inflation indicator, then investors should be scrambling out of Treasury bonds. If gold is merely part of a speculative binge, then some suckers are being drawn in at the top of the market.
The bond market has not given a decisive signal either way. On the one hand, 10-year US Treasury yields have moved up from 4.5 per cent to 5.1 per cent over the past three months and the yield curve has moved from an inverted shape (short rates higher than long rates) to upward-sloping. Inverted yield curves are normally seen as harbingers of recession; upward-sloping curves can point to potentially higher inflation.
But long rates would surely be a lot higher than short rates if investors believed inflation was truly getting out of control. On Tuesday, when gold made its decisive move, Treasury bonds barely budged.
Break-even inflation rates (the gap between index-linked and conventional bond yields) have moved up in the US this year from 2.3 per cent to 2.7 per cent. According to Tim Bond of Barclays Capital, there was a 20 basis point jump in forward/forward break-even rates just after Federal Reserve chairman Ben Bernanke's testimony to Congress.
However, these moves hardly suggest the kind of inflation expectations that justify gold's bull run. The nature of the commodity surge suggests other factors may be involved. Gold has been easily outpaced by copper, which no one regards as a traditional store of value or a currency in its own right.
The sceptics camp has some impressive spokesmen; highly successful investors such as Bill Miller and Warren Buffett have both opined that speculation has become the driving force in the commodity markets. But the problem is that commodities are non-yielding assets, so it is difficult to construct sensible valuation parameters for them. At times like this, that can mean the sky is the limit.
Published: May 11 2006 03:00 | Last updated: May 11 2006 03:00. Copyright by The Financial Times
Gold's surge past $700 raises again the question that has dogged the markets over the past year or so: is bullion's rise a signal that investors are worried about inflationary pressures and a dollar collapse or is it simply a symptom of speculative enthusiasm?
The answer has enormous implications for investors. If gold is an inflation indicator, then investors should be scrambling out of Treasury bonds. If gold is merely part of a speculative binge, then some suckers are being drawn in at the top of the market.
The bond market has not given a decisive signal either way. On the one hand, 10-year US Treasury yields have moved up from 4.5 per cent to 5.1 per cent over the past three months and the yield curve has moved from an inverted shape (short rates higher than long rates) to upward-sloping. Inverted yield curves are normally seen as harbingers of recession; upward-sloping curves can point to potentially higher inflation.
But long rates would surely be a lot higher than short rates if investors believed inflation was truly getting out of control. On Tuesday, when gold made its decisive move, Treasury bonds barely budged.
Break-even inflation rates (the gap between index-linked and conventional bond yields) have moved up in the US this year from 2.3 per cent to 2.7 per cent. According to Tim Bond of Barclays Capital, there was a 20 basis point jump in forward/forward break-even rates just after Federal Reserve chairman Ben Bernanke's testimony to Congress.
However, these moves hardly suggest the kind of inflation expectations that justify gold's bull run. The nature of the commodity surge suggests other factors may be involved. Gold has been easily outpaced by copper, which no one regards as a traditional store of value or a currency in its own right.
The sceptics camp has some impressive spokesmen; highly successful investors such as Bill Miller and Warren Buffett have both opined that speculation has become the driving force in the commodity markets. But the problem is that commodities are non-yielding assets, so it is difficult to construct sensible valuation parameters for them. At times like this, that can mean the sky is the limit.
posted by Carlos T Mock at 2:30 PM
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