A Holiday Sampler Of Indicators

December 30, 2010

Some useful market indicators to watch in 2011.

Our two-part series (“Deciphering The Inflation Scorecard: Why Gold?” and “Deciphering The Inflation Scorecard: Part 2”) explaining the indicators featured in each Friday’s Inflation Scorecard prompted a number of queries about other indicators used by market analysts.

Well, there are as many indicators as there are analysts, I reckon, but here are a few—in no particular order of importance—that I often use as adjuncts:

Real T-Bill Yield - Many readers are familiar with the term “inflation-adjusted.” It’s used to describe the effect of price inflation—typically measured by the Consumer Price Index—on an investment’s return. Here, at Hard Assets Investor, we make a distinction between price inflation and monetary inflation. Monetary inflation takes the measure of currency debasement in a global sense by comparing the dollar’s relative purchasing power against gold and the world’s second reserve currency, the euro. Our Monetary Inflation Index, as a result, is much more sensitive to money velocity than a metric like CPI.

We update the Monetary Inflation Index in each daily Brad’s Desktop column so investors can put their fingers on the pulse of monetary flows in real time. Usually, changes in the monetary inflation trend precede gyrations in the CPI and its sibling, the Producer Price Index. Lately, daily readings of the 12-month monetary inflation rate have been negative, or disinflationary. Year-over-year, the CPI is modestly positive, but when you plot this 12-month rate, you see its trendline follows that of our Monetary Inflation Index.

Figure 1. 12-Month Inflation Rates

When you subtract the 12-month inflation rate from the annualized yield of an investment, you can see inflation’s—or disinflation’s—impact. A positive “real” or inflation-adjusted yield indicates a tame inflationary environment. When real yields are negative, returns are being diluted by expansion in the circulating monetary base.

Adjusted for monetary inflation, the real yield on three-month Treasury Bills is presently positive—at 82 basis points, or 0.82 percent. The real yield is calculated by compounding the present 12- basis point Bill yield by the current monetary inflation rate (-1.4 percent) over a one-year horizon.

Figure 2: Real T-Bill Yields

As you can see from Figure 2, real yields have actually been positive—albeit highly volatile—since May. Positive yields make T-Bills an attractive investment, relative to euro-denominated paper. At least for now.

Gold’s Proportion In The CRB Index - The Thomson Reuters/Jeffries CRB Index is a benchmark proxy of the commodities market comprised of 19 diversified futures, including gold.

Over the past decade, the CRB Index has been led upward by gold. Lately, though, gold’s influence in the commodities market has waned. This can be visualized by using gold’s spot price as the numerator in a ratio with the CRB Index.

When graphed, the ratio illustrates gold’s momentum in the commodity world (see Figure 3).


Figure 3: Gold Vs. CRB Index

Gold’s primacy has recently faltered (see the breakdown from the wedge pattern above) as other commodities—namely softs and grains—have shot up on supply concerns.

The SPDR Gold Shares Trust (NYSE Arca: GLD) is the largest grantor trust holding gold bullion. Present vault holdings—at 1,284 tonnes—exceed that of most central banks. Capital movements in and out of GLD are barometers of retail gold investment demand.

By weighting money flows by volume, the strength of that demand can be better assessed. The Money Flow Index (see Figure 4) does that by comparing positive to negative flows over a 14-day period, reducing them to an index on a 0-100 scale.

GLD’s MFI is more closely correlated to the trust’s share price than the level of its bullion assets (see “Clues To GLD’s Price Trajectory”). Investors should watch for divergences in the MFI and price trends. When MFI moves in an opposite direction, the price trend can be expected to change.

Figure 4: GLD Money Flow Index

Recent examples: GLD’s MFI peaked in the run up to the mid-term elections, topping out at 90.05 on October 1. The index then heeled over to 70.00 within a week, preceding a $5 drop in GLD’s price. A month later, a downspike in MFI readings foreshadowed a near-term double-top in GLD’s share price, resulting in a $6 dip.

Nuts And Chews

Like a Whitman’s Sampler, this is just a small compendium of indicators. There are certainly a lot more. Not every investor will see the utility in these indicators. Some people like chocolate-covered nuts; some like chews. It’s the same way with analytical tools.

With this offering and the Inflation Scorecard series, however, readers should have a pretty wide selection of indicators from which to choose. Hopefully, nobody breaks a tooth on any of them.

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