By Jonathan Barratt

If you told the market in Sept 2010 that stimulus was going to remain in play for the foreseeable future, the gold price would have rocketed head. Well last week it did on the announcement from Bernanke on stimulus, however since then it has succumbed to selling pressure. This just goes to cement the idea that stimulus is really not doing a lot to help grow the economy. So far there is no evidence to support the fact that stimulus equals inflation -- well not yet -- but we continue to feel that eventually it will evolve. However, we have always maintained a correlation between short-term bond prices and gold. As can be seen from the chart below for the 2yr note over the gold price.

If the yields were going down (futures up) the prospects for gold look better. Likewise if yields are up (futures down) the prospects for gold look disappointing. Of late we have refocused on this correlation, as the 2 yr note futures have spiked (yields down) due to Bernanke's comments but gold, after a short spike higher, has just continued to slide. It is currently out of sync with this correlation. Intuitively, if futures go up (yields down) the prospects for price pressures to the upside should increase in the short-term. It is an argument around the fact that there is more money in the system to spend. At the moment we can see that gold is lagging behind and if stimulus is to be kept up to the markets in the short term, the gold price needs to be supported. If the correlation holds it value, which we feel it should.