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TheStreet Open House

Global Macro: Rates Bring Down Gold

NEW YORK ( TheStreet) -- The rising U.S. yield curve and the diminishing price of gold is an intermarket relationship that has had a strong correlation the past few months.

The goal of quantitative easing was to lower both short term and long term rates in order to stimulate investment and deter saving. The plan went along smoothly until whispers of an end to the Federal Reserve's bond buying program surfaced in May.

The yield curve has since spiked higher off of its lows and started an uptrend, leaving the carnage of the long bond in its path.

The chart below is of iShares Barclays 1-3 Year Treasury Bond (SHY) over iShares Barclays 20+ Year Treasury Bond (TLT). This pair is a graphical representation of the U.S. yield curve. As the pair moves higher, long dated bonds underperform shorter term bonds leading to a quicker rise in long term yields.

As an end to quantitative easing has become a reality this pair has normalized and traded at elevated levels justified by economic data.

The U.S. economic recovery remains gradual, but the outlook continues to improve which means an eventual end to accommodative policy.

The next chart is of SPDR Gold Shares (GLD) over CurrencyShares Swiss Franc Trust (FXF). The U.S. dollar has been weakening although rates have been on the rise. This divergence causes measuring the strength of gold relative to the dollar an unrepresentative measurement of its absolute value. For this reason gold will be priced in Swiss francs in the chart below.

The chart looks very similar to the actual price movement of gold, but the stability of the franc allows for absolute value and the identification of trend pivots to be seen more clearly.

Rising rates have weighed on the value of gold. Gold caught a bid in the early 2000's as the Fed moved towards a weak dollar policy.

Rates fell alongside the dollar's deterioration. As the market begins pricing in an end to central bank intervention and a normalized yield curve, gold has sold off.

Watch for increasing rates leading up to September to push gold down from its current levels at the top of its downward channel.

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