System Design  |  APR 1996

The GMI Bond Market System by Dennis Meyers, Ph.D.

The GMI Bond Market System by Dennis Meyers, Ph.D. This S&C Contributing Editor details a trading system for predicting Treasury bond yields that uses Barron's Gold Mining Index (GMI) to signal changes. He compares the performance of the trading system with his previous use of the S&P electric utility bond market system. In addition, he tests the GMI T-bond system for trading the Fidelity Government Securities Fund. The connection between gold and interest rates is well known; gold prices are often used as a proxy for future inflation. Today's perception of future inflation rates causes bond prices to rise and fall. If inflation is perceived as rising in the future, then bond prices will decline and bond yields will rise. If inflation is perceived as declining in the future, then bond prices will rise and bond yields will fall. Although the current inflation rate is published by the government on a monthly basis, this statistic relates to inflation in the past, not future inflation. The price of gold has historically been used as a store of value and as a predictor of future inflation. As gold prices climb, investors feel that future inflation will rise. If gold prices decline, investors feel that future inflation will decline. But there are no formulas or rules to determine the exact relationship between gold and future inflation or between gold and the direction of future interest rates. This article will use the Barron's Gold Mining Index (GMI) as a bond price direction gauge. Various technical analysis indicators on GMI will be created and tested in an attempt to formulate a system to predict the direction of long-term interest rates.

by Dennis Meyers, Ph.D.