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Intermarket Explanation for the Coming Gold Bubble

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In an intermarket sense, the trigger for the coming bubble in gold will be the shift of funds out of bonds and into gold and the like.

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Moreover, and this a point others have made, gold's increasing share as part of the global financial pie is more a result of an increase in gold's value than an increase in actual ownership. Back in 1999-2001, gold's share was less than 0.5%. Now it is six or seven times higher. Yet, gold's value is roughly six times higher!

While some of the newly created money and debt will find its way into gold, the biggest inflows into gold will come from other markets and particularly bonds. The bond market, which dwarfs the equity and commodities markets, is by far the biggest market in the world. In recent years and in response to the global economic malaise, the average investor and average institution have shifted funds out of equities and into bonds. Inflows into bond funds have been gargantuan while inflows into equity funds have been negative. Thus, in an intermarket sense, the trigger for the coming bubble in gold will be the shift of funds out of bonds and into gold and the like.

One way to monitor this is to graph gold against bonds. Below we show gold against bonds (bottom) and silver against bonds (top). Both charts are at an interesting juncture. The next breakout in both charts would surpass the 1980 peak and result in all time highs. Gold and silver have outperformed bonds for a number of years but the outperformance would accelerate upon breakout in these charts.



In the meantime, gold and silver and the shares have begun to correct and digest the strong gains from the recent rebound. October is the only bearish part of the seasonally bullish period. Interim bottoms typically occur in the middle of or near the end of October. Thus, the coming days and weeks could be an opportunity to shed some bonds in favor of bullion and to pickup some stocks, which you may have missed at the last bottom.

Editor's Note: See more from Jordan Roy-Byrne at The Daily Gold.
No positions in stocks mentioned.

The information on this website solely reflects the analysis of or opinion about the performance of securities and financial markets by the writers whose articles appear on the site. The views expressed by the writers are not necessarily the views of Minyanville Media, Inc. or members of its management. Nothing contained on the website is intended to constitute a recommendation or advice addressed to an individual investor or category of investors to purchase, sell or hold any security, or to take any action with respect to the prospective movement of the securities markets or to solicit the purchase or sale of any security. Any investment decisions must be made by the reader either individually or in consultation with his or her investment professional. Minyanville writers and staff may trade or hold positions in securities that are discussed in articles appearing on the website. Writers of articles are required to disclose whether they have a position in any stock or fund discussed in an article, but are not permitted to disclose the size or direction of the position. Nothing on this website is intended to solicit business of any kind for a writer's business or fund. Minyanville management and staff as well as contributing writers will not respond to emails or other communications requesting investment advice.

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