Monitoring the battle between reflation and disinflation forces is paramount when it comes to choosing between cyclical or defensive investment vehicles. One ratio we use to capture this dynamic is the gold-to-bond ratio (G/B). When the latter is rising, reflation forces are winning and commodities tend to outperform bonds. The opposite is true. Despite nearly doubling from its 2015 cyclical low, it is only recently that gold prices have begun to appreciate faster than bond prices, which are being propped up by historic levels of excess liquidity from world central banks. Nevertheless, the second panel of Figure 1 shows that the G/B ratio is now accelerating higher. In fact, the ratio is now standing 20% above its rising 4-yma (third panel). If the early 2004 experience is any guide, this means that reflation forces are dominating disinflation forces and as a result, we think the odds are that the commodities are in the early stage of a bull market relative to bonds. One caveat behind the G/B ratio analysis though is that contrary to the 2004 environment, bond yields are NOT rising. This suggests a scenario where inflation accelerates much above the Fed’s 2% target is not around the corner. We are OW commodities in our asset mix. Investors can have exposure through commodities as an asset class via the DBC-ETF. The GUNR-US ETF, which is a basket of natural resource equities, provides exposure as well.
Figure 1
