Memorial Archives

Deflation vs Inflation
posted Aug 26, 2004 at 08:06PM

Amazing how many key currency related indices are coming to critical 50/200dma convergence tests. Above is a chart that measures the performance of long bonds vs. gold.

As one would expect, in an inflationary environment bonds will underperform gold...and in my thinking they would outperform in a deflationary environment, as investors chase yield?

Actually I am not certain of that...but it does have a certain linear logic to it. Obviously bonds outperforming gold is saying that the market is no longer worried about inflation...rightly or wrongly.

A rising chart is negative for gold as it continues to narrow the yield spread and negate the inflationary impacts of the carry trade. Given my motto for the year has been "Paper = Death", I think this uptrend will continue.

A break to the downside is a plus for gold for the opposite reasons.

As we see, the chart seems to be in the midst of charting out a decision triangle....whether this is just another correction..or a leading diagonal signalling a trend change - only time will tell

The risk of whip-saw is high....even if I go long gold, which I am is strictly "trading" not investing.

A reminder of yesterday's charts showing key levels on currency to keep track of...90 resistance for the USD and 120 support for the XEU. So far each are holding and thus gold remains steady.

Tomorrow's economic numbers (GDP) may be what the market is waiting for to make it's decisions. It is not a time to get religious about one's viewpoint or about whether the market is acting correctly. Let it speak, listen and try to act in an appropriate and "nimble" manner.

Good trading.

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