As I
wrote about here back in August, gold was perhaps giving a very different signal to debt markets on what the FOMC might do at the meeting which has now just passed.
Given the big drop on gold lead the big sell off in bonds earlier in the year, was this divergence perhaps providing another important signal?
With the benefit of hindsight we can now provide the answer - which is yes.
Since gold and bonds parted ways back at the start of August, gold has around the same level, while bonds have rallied strongly, mostly on the back of the surprise decision not to taper.
This relationship can be analysed more formally using the model I have developed to also account for fall in the USD. As shown on the chart on the left, the modelled and actual values have converged after the significant divergence back in August
So it does now seem that the USD, gold and real interest rates are now on the same page after diverging pre the FOMC. That said, gold is relatively weak at the current level of the US trade weighted index compared to very recent history, as show on the chart below (click to expand)
The bottom line is that in the last 12 months, gold is proving to be a good leading indicator of bond movements when the 2 diverge. While there doesn't appear to be any obvious divergence at present, watching gold could prove more informative to the prospects of a change in Fed policy before debt markets.
This is despite not a lot happening to ETF holdings of gold in the last month or so. Total holdings via ETFs has slipped a little further in the last month, although this may just be into less visible OTC investments.
While ETF movements are not supportive of price movements either way, futures positioning has been a plus, with short covering helping to drive prices higher.
When accounting for passive index fund positions, it would seem that discretionary speculative positioning is now fairly balanced between bulls and bears.
