My suggestion [for understanding market inter-relations] is to set markets against each other and then look at how they react to a common metric. What you will find is that such an exercise yields valuable timing information. What many perceive as the most difficult part (choosing the metric) is often nothing to worry about. That is, almost all of them work, such that the news of markets turning is writ large across the landscape.

The first consideration however is to compile the various markets as assets in which to invest. That is, instead of using yields, one must use prices as it is prices by which they compete. The best trick I can pass on is for the game theorist to start by looking longer term and then shorten up. Think years and quarters rather than intraday.There's more if there is any interest.

Rocky Humbert writes: 

One notes that "real" interest rates have backed up about 40 bp in the past week, and gold is responding in kind. Eddy Elfenbein is one of several people who have postulated a relationship between Gold Prices, Real Interest Rates, and Gibson's Paradox. Correlation is not causation of course — but his model has been working brilliantly. Read about it here.

It's also a good moment to brush up on Gibson's Paradox which notes that interest rates follow the price level and not inflation (when operating on a gold standard). According to what I've read about Gibson (which is very little) , everyone from Larry Summers to Milton Friedman accept the existence of Gibson's Paradox … but noone seems to agree on the underlying theory.

Just a quick and dirty note: Eddy Elfenbein's model says that for every -1% (annual) move in real interest rates, gold compounds upwards by 8% (annual). So back of the envelope, a 50 basis point rise in real yields "should" clip gold by 4 or 5 percent or so … and amazingly that's what happening. Now … all I need to do is PREDICT where real interest rates will be next week…


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