Cejay Kim of Palisade Research - Tue, Dec 29, 2015

The German-US 10-Year Bond Yield Spread Indicates a Christmas Gold Rally has Just Begun

German-US 10-Year Bond Yield Spread Vs. Gold Price

The German-US yield spread is often used as a leading indicator of gold prices. Whenever the spread becomes negative, history dictates that a gold rally is on the horizon.

Using monthly data for 10-year treasuries, one significant bottom occurred in May 2006 which ignited a gold rally that ended 23 months later and saw gold prices increase by from $638 per ounce to $969.

The subsequent bottoming occurred in April 2010 and saw gold prices rally from $1,116 per ounce to 1,816 in just 18 months.

When the German-US yield becomes negative, there is a disconnect between the monetary policies of the United States and the Eurozone. In this case, it's Yellen finally tightening the reigns while the Eurozone eases. Intuitively, this sort of divergence is negative for gold, however, since the market is always pricing for the future, the art is in interpreting the graph and the next steps by the bank.

It appears that the German-US yield spread has reached another bottom, and if this is the case, 2016 and onward will finally see a sustained gold rally.

We expect at some point the United States will need to get on the same page as European Central Bank or Europe will face massive inflation. Furthermore, the US is entering 2016 precariously and will eventually be forced to lower rates as managed numbers are finally unveiled. All signs point to the spread increasing again and a rally in gold prices.

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