Thought Leadership

When Markets Disagree

January 27, 2006

If markets are efficient, can well developed and liquid markets reach opposite conclusions about the future direction of inflation?

Gold has long been viewed as a barometer of inflation expectations. In this historic context, owning gold was the original real return strategy.  For most of this period, gold and Treasury inflation expectations appear closely linked.  Then, beginning in early November, the two data series moved in different directions.  Commodity investors remained concerned about inflation, driving the price of gold higher.  Treasury investors became less concerned about inflation and Treasury market expectations for inflation fell for several weeks before rising again more recently. For the period, gold prices have risen 31%.  Treasury market expectations for inflation remain in a tight range of 2.3% to 2.6%.