Gold, Bonds and the S&P 500 Ahead of the Bernanke

Several stories have dominated the financial world over the past several weeks. The parabolic rise and then fall in Gold, the impact of the Debt Ceiling Limit debacle, the economic disaster that is Europe and the end of QE2. These events created interesting relationships between Gold, Treasuries and Equities. As we prepare for what might be the next big story, with the Kansas City Fed Retreat in Jackson Hole and the Bernanke speech Friday, it seemed appropriate to review this. There is just one chart here but so much information to glean from it. The chart below is a ratio chart of the SPDR Gold Trust Shares (ticker: $GLD) against the iShares Barclays 20+ Year Treasury Bond Fund (ticker: $TLT) against the backdrop of the S&P 500 SPDR (ticker: $SPY). In simple terms Gold against Treasuries with a shadow of the S&P 500 since the move higher in the

market began in September 2010. The first thing to notice is that from September until the beginning of August the ratio of Gold to Bonds was highly correlated to the SPY. You can see the Bollinger bands for the ratio moving closely along the SPY curve. Next notice that for the first part of the period, the run higher in the SPY, the ratio was rising, favoring a move from Bonds into Gold. As QE2 was playing out the SPY was running higher and Gold was out pacing bonds. An inflationary environment. Money moved into risky assets. But as the SPY peaked in late April the ratio between Gold and Bonds stabilized and has since moved sideways, becoming more correlated, while the correlation with the SPY continued strong. This was when concurrently the QE2 was ending and Europe was imploding. QE2 ending led to the leveling of the SPY and put downward pressure on Gold, but the events in Europe put upward pressure on Gold and on Bond prices. The net result is seen in the ratio moving to flat as Bonds gained relatively. Finally as the SPY began its decline, the Gold to Bonds ratio continued to hold its tight relationship and abandoned its correlation to the SPY. This indicates that the SPY was the one that uncoupled as the economic concerns in the US took a larger role, while the European problems continued to escalate that holding Gold and Bonds and thus the ratio higher.

A lot of history there but what does it mean going forward? Well who knows what the Bernanke will say but if the market interprets it as a safety net for the economy and or the markets most expect a rise in the SPY this picture would suggest a reconnection with the Gold to Bonds ratio, so a move up in the SPY would lead to a renewed move higher in the Gold to Bond ratio, implying a movement from Bonds into Gold. If the market interprets any news from Wyoming as neutral for the SPY then a continued move sideways in the Gold to Bond ratio would be expected. An interpretation that is negative for Stocks suggests that the Gold to Bond ratio would continue sideways or may start to fall with a further move lower in SPY would be expected. This would likely be the result of money flowing back into Bonds more so than a move out of Gold with the current world situation. There is a lot more that could be said maybe at a later time. The bottom line is that the events in Wyoming are apt to have the biggest impact on the SPY and then Bonds, with Gold continuing to focus on the European situation and other factors keeping it higher.

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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