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Bond Rallies End; Gold Is Forever

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In short term, however, bonds should be given room to run.

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Editor's Note: The following was posted in real time on our premium Buzz & Banter. It's being shared here for the benefit of the Minyanville community.

Hopefully, bond-bear Minyans dodged the bullet yesterday in the Ultrashort 20+ Treasury ETF (TBT). The question now: Where does the bond rally fail, given the obviously inflationary nature of what the Fed is doing?

I obviously don't know the answer to that question, but I think we definitely want to give the bonds some room to rally, given the large number of shorts and the fact that the Fed will likely buy weakness in order to keep the rally going (not to mention those who will misguidedly want to buy what the Fed is buying).

My guess at the moment is that the Barclays 20+ year Treasury ETF (TLT) could rally all the way back to its December peak before potentially double-topping, but we'll just have to see. On a related matter, we should finally solve the debate between deflation and inflation by watching the gold/bond ratio.


Click here to enlarge.


That ratio has been in an inflationary trend since 1999, as gold has risen more than the bond market during that period, after having been in a disinflationary trend from 1980-1999, during which bonds vastly outperformed gold.


Click here to enlarge.


After a slight hiccup in late 2008, this gold/bond ratio has begun to rise once again, and should make new highs as gold and the bonds likely rally together initially. Gold will simply go up more.

But eventually the ratio should even make new all-time highs as gold continues to rise, but the bond market rolls over and falls. However, a mere new 52-week in this ratio should be all it takes to finally put to rest the notion that we could ever see a "deflation" into the US dollar - which is the currency of the world's largest debtor, after all.
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