Gold and Bonds Are Sending a Signal Reminiscent of 1987 and 1973

If bond yields and gold rise in tandem, the market may turn the opposite way. At least, that’s what historic parallels suggest.

Higher gold prices paired with rising bond yields is one trend to watch to signal impending market volatility, according to a new report from Bank of America Merrill Lynch. Both the stock market crash of 1973-1974 and Black Monday in October 1987 were preceded by three quarters of rising bond yields and rising gold, according to the report by strategist Michael Hartnett and colleagues.

The thinking is that if interest rates and gold rise in tandem, it signals rising inflation, which lead the Federal Reserve to increase its short-term interest rate targets. Rate hikes tend to be bad news for the economy and for stocks in particular.

To Hartnett’s point, inflation expectations have recently risen considerably, thanks to the election of Donald Trump as well as the Fed’s decision to raise rates in December.

In the markets, gold is positive this year, rising nearly 6 percent, and it has just concluded its best week since April after sliding in the third and fourth quarters of 2016. The 10-year Treasury yield rose considerably in the second half of 2016, but is lower in 2017.

“For years, gold was the inflation play and the fear play, and I would say that we probably had a bit of both over the past few months, regardless of what end of the political spectrum you’re on,” Zachary Karabell, head of global strategy at Envestnet, said Thursday on CNBC’s “Trading Nation.”
“So the Fed raising rates in December, even though they didn’t do anything this week, is an indication that there’s some modest anticipation of inflation,” he said.

In its post-meeting statement Wednesday, the Fed shed little light on its rate-raising plans. In December, it indicated it expects three rate increases this year.

CNBC
2/6/2017