Gold
The gold market plays a key role in the entire intermarket story. Gold is viewed as a safe haven during times of political and financial upheavals. As a result, stock market investors will flee to the gold market, or gold mining shares, when the stock market is in trouble. Certainly, gold will do especially well relative to stocks during times of high inflation but will underperform stocks in times of declining inflation.
Gold plays a crucial role because of its strong inverse link to the dollar, its tendency to lead turns in the general commodity price level, and its role as a safe haven in times of turmoil.
A major bottom in the gold market (which usually coincides with an important top in the dollar) is generally a warning that inflation pressures are just starting to build and will in time become bearish for bonds and stocks. A gold market top (which normally accompanies a bottom in the dollar) is an early indication of a lessening in inflation pressure and will in time have a bullish impact on bonds and stocks. However, it is possible for gold to drop along with bonds and stocks for a time.
Itâs important to recognize the role of gold as a leading indicator of inflation. Gold doesnât react to inflation; it anticipates inflation.
Global Interest Rates
The attractiveness of the dollar, relative to other currencies, is also a function of interest rate differentials with those other countries. In other words, if U.S. rates are high relative to overseas interest rates, this will help the dollar. If U.S. rates start to weaken relative to overseas rates, the dollar will weaken relative to overseas currencies. Money tends to flow toward those currencies with the highest interest rate yields and away from those with the lowest yields. This is why itâs important to monitor interest rates on a global scale.
The normal sequence of events among the various sectors is as follows:
[ul]
[li]Rising interest rates pull the dollar higher.
[/li][li]Gold peaks.
[/li][li]The CRB Index peaks.
[/li][li]Interest rates peak; bonds bottom.
[/li][li]Stocks bottom.
[/li][li]Falling interest rates pull the dollar lower.
[/li][li]Gold bottoms.
[/li][li]The CRB Index bottoms.
[/li][li]Interest rates turn up; bonds peak.
[/li][li]Stocks peak.
[/li][li]Rising interest rates pull the dollar higher.
[/li][/ul]
Commodity Indexes
The precious metals and the energy groups are especially important because of their impact on the overall commodity price level and their wide acceptance as barometers of inflation.
However, although each individual commodity market has equal weight in the CRB Index, this does not mean that each commodity group carries equal weight.
The three most important sectors to watch when analyzing the CRB Index are the grains, metals, and energy markets.
International Markets
Global markets generally trend in the same direction.
DJIA, FTSE, NIKKEI, DAX
This phenomenon is especially interesting. I wonder why are they moving in harmony with each other?
Although the stock markets of individual countries may not rise or fall at exactly the same speed or time, all are influenced by the global trend.
The British market has a tendency to lead the U.S. market at peaks. - Iâm not really sure about that. I checked it, and canât confirm it.
Itâs important to watch global trends when analyzing the US Bond market (Japanese Bonds, British Bonds, etc.)
U.S. bond prices becomes very important. If world bond prices are showing signs of moving lower, chances are U.S. bond prices will follow. Technical analysis of global bond trends becomes a part of the analysis of the U.S. bond market.
U.S. stock prices are influenced in two ways by global markets. First, by a direct comparison with overseas stock markets, such as Britain and Japan (which are influenced by their own domestic bond markets). And second, by U.S. bond prices which are themselves influenced by global bond markets.
