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Is Something Different? Yield Spreads vs USD
posted Jun 9, 2005 at 10:48PM

I remember, in what seems a long while back, reading a Saville article where a widening yield spread was good for gold stocks and a narrowing yield spread was bad for gold stocks. The first two charts below seem to bear that out

You can see that the long corrective process in gold stocks started when the yield spread topped out. Now all things considering, the HUI looks like it has held up well despite the collapse of the yield spread.

Now of course the big question is whether this narrowing of the yield spread has hit a bottom? From what I understand the Fed plans to continue its "measured" raising of rates. What about the long side? Would bonds selling off, ie. a rise in yields, start widening the yield spread and give a boost to gold stocks?

Not long ago I would have said no. And the reason is that over the past fews years of the USD bear market, any USD countertrend rallies have happened in conjunction with long bonds selling off i.e. rising yields.

Indeed that is why the dollar bulls are saying when the bonds end thier pre-natural strength, the green-back is going to take off

But look at the charts below, which show that perhaps another relationship that has applied over the past few years may now be changing.

Have things changed? Here we see for this first time in years that the USD is trending in lockstep with bond prices. Bonds move does the USD....Bonds sell off and down goes the greenback.

Now it is too soon to say whether the above marks some kind of sea-change but obviously the relationship between bonds is one to keep an eye on.

As far as why this would be happening I don't really know. I must admit bonds and yield spreads and impact on dollar and gold is getting into rubic cube territory for me.

Obviously being bullish on gold what I would expect to see is a sell off in bonds resulting in a selling off of the USD.

We should find out soon enough as, not shown here, bonds are definitely toppy on both the daily and weekly charts.

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