Best of the Week
Most Popular
1. Stock Markets and the History Chart of the End of the World (With Presidential Cycles) - 28th Aug 20
2.Google, Apple, Amazon, Facebook... AI Tech Stocks Buying Levels and Valuations Q3 2020 - 31st Aug 20
3.The Inflation Mega-trend is Going Hyper! - 11th Sep 20
4.Is this the End of Capitalism? - 13th Sep 20
5.What's Driving Gold, Silver and What's Next? - 3rd Sep 20
6.QE4EVER! - 9th Sep 20
7.Gold Price Trend Forecast Analysis - Part1 - 7th Sep 20
8.The Fed May “Cause” The Next Stock Market Crash - 3rd Sep 20
9.Bitcoin Price Crash - You Will be Suprised What Happens Next - 7th Sep 20
10.NVIDIA Stock Price Soars on RTX 3000 Cornering the GPU Market for next 2 years! - 3rd Sep 20
Last 7 days
Silver Bulls Will Be Handsomely Rewarded - 21st Sep 20
Fed Will Not Hike Rates For Years. Gold Should Like It - 21st Sep 20
US Financial Market Forecasts and Elliott Wave Analysis Resources - 21st Sep 20
How to Avoid Currency Exchange Risk during COVID - 21st Sep 20
Crude Oil – A Slight Move Higher Has Not Reversed The Bearish Trend - 20th Sep 20
Do This Instead Of Trying To Find The “Next Amazon” - 20th Sep 20
5 Significant Benefits of the MT4 Trading Platform for Forex Traders - 20th Sep 20
A Warning of Economic Collapse - 20th Sep 20
The Connection Between Stocks and the Economy is not What Most Investors Think - 19th Sep 20
A Virus So Deadly, The Government Has to Test You to See If You Have It - 19th Sep 20
Will Lagarde and Mnuchin Push Gold Higher? - 19th Sep 20
RTX 3080 Mania, Ebay Scalpers Crazy Prices £62,000 Trollers Insane Bids for a £649 GPU! - 19th Sep 20
A Greater Economic Depression For The 21st Century - 19th Sep 20
The United Floor in Stocks - 19th Sep 20
Mobile Gaming Market Trends And The Expected Future Developments - 19th Sep 20
The S&P 500 appears ready to correct, and that is a good thing - 18th Sep 20
It’s Go Time for Gold Price! Next Stop $2,250 - 18th Sep 20
Forget AMD RDNA2 and Buy Nvidia RTX 3080 FE GPU's NOW Before Price - 18th Sep 20
Best Back to School / University Black Face Masks Quick and Easy from Amazon - 18th Sep 20
3 Types of Loans to Buy an Existing Business - 18th Sep 20
How to tell Budgie Gender, Male or Female Sex for Young and Mature Parakeets - 18th Sep 20
Fasten Your Seatbelts Stock Market Make Or Break – Big Trends Ahead - 17th Sep 20
Peak Financialism And Post-Capitalist Economics - 17th Sep 20
Challenges of Working from Home - 17th Sep 20
Sheffield Heading for Coronavirus Lockdown as Covid Deaths Pass 432 - 17th Sep 20
What Does this Valuable Gold Miners Indicator Say Now? - 16th Sep 20
President Trump and Crimes Against Humanity - 16th Sep 20
Slow Economic Recovery from CoronaVirus Unlikely to Impede Strong Demand for Metals - 16th Sep 20
Why the Knives Are Out for Trump’s Fed Critic Judy Shelton - 16th Sep 20
Operation Moonshot: Get Ready for Millions of New COVAIDS Positives in the UK! - 16th Sep 20
Stock Market Approaching Correction Objective - 15th Sep 20
Look at This Big Reminder of Dot.com Stock Market Mania - 15th Sep 20
Three Key Principles for Successful Disruption Investors - 15th Sep 20
Billionaire Hedge Fund Manager Warns of 10% Inflation - 15th Sep 20
Gold Price Reaches $2,000 Amid Dollar Depreciation - 15th Sep 20
GLD, IAU Big Gold ETF Buying MIA - 14th Sep 20
Why Bill Gates Is Betting Millions on Synthetic Biology - 14th Sep 20
Stock Market SPY Expectations For The Rest Of September - 14th Sep 20
Gold Price Gann Angle Update - 14th Sep 20
Stock Market Recovery from the Sharp Correction Goes On - 14th Sep 20
Is this the End of Capitalism? - 13th Sep 20
The Silver Big Prize - 13th Sep 20
U.S. Shares Plunged. Is Gold Next? - 13th Sep 20
Why Are 7,500 Oil Barrels Floating on this London Lake? - 13th Sep 20
Sheffield 432 Covid-19 Deaths, Last City Centre Shop Before Next Lockdown - 13th Sep 20
Biden or Trump Will Keep The Money Spigots Open - 13th Sep 20
Gold And Silver Up, Down, Sideways, Up - 13th Sep 20
Does the Stock Market Really "See" the Future? - 12th Sept 20
Basel III and Gold, Silver and Platinum - 12th Sept 20
Tech Stocks FANG Index Nearing Critical Support – Could Breakout At Any Moment - 12th Sept 20
The Tech Stocks Quantum AI EXPLOSION is Coming! - 12th Sept 20
AMD Zen 3 Ryzen 4000 Questions Answered on Cores, Prices, Benchmarks and Threadripper Launch - 12th Sept 20
The Inflation Mega-trend is Going Hyper! - 11th Sep 20
Gold / Silver Ratio: Slowly I Toined… - 11th Sep 20
Stock Market Correction or Reversal? The Jury Isn't Out! - 11th Sep 20
Crude Oil – The Bearish Outlook Remains - 11th Sep 20
Crude Oil Breaks Lower – Sparking Fears Of Another Sub $30 Price Collapse - 11th Sep 20
Inflation by Fiat - 10th Sep 20
Unemployment Rate Drops. Will It Drag Gold Down? - 10th Sep 20
How Does The Global Economy Recover After This Global Pandemic? - 10th Sep 20
The Best Mobile Casino - 10th Sep 20

Market Oracle FREE Newsletter

How to Get Rich Investing in Stocks by Riding the Electron Wave

Is This Time Different? Predictive Power of the Yield Curve and Gold

Commodities / Gold & Silver 2019 Aug 19, 2019 - 03:36 PM GMT

By: Arkadiusz_Sieron

Commodities

This time is different. This is what the experts say. The inversion of the yield curve did a great job in predicting recessions in the past, but the current inversion is not like the previous. The predictive power of the yield curve has weakened, so it does not signal the recession. This is what the pundits claim. We invite you to read our today’s article and find out whether the experts are right and what does it mean for the gold market.

This time is different. This is what the experts say. The inversion of the yield curve did a great job in predicting recessions in the past, but the current inversion is not like the previous. The predictive power of the yield curve has weakened, so it does not signal the recession. This is what the pundits claim. Are they right?


First of all, many doubt whether we can really trust the signals sent by the yield curve, given that the central banks heavily intervened in the bond markets in the aftermath of the Great Recession. When the short-term interest rates reached almost zero, the Fed started to buy many securities to lower the long-term yields, which flattened the yield curve. So it might be the case that without the U.S. central bank’s impact on the bond prices, the yield curve would be steeper or even not inverted. In other words, it might be the case the yield curve is inverted only because the long-term rates are artificially compressed. If true, the yield curve can be inverted even if short-term interest rates remain stimulative to the real economy (they are not above the ‘true’ level of long-term yields which reflect the neutral rates) and thus are not serving to depress activity.

While this reasoning is plausible, there are two problems with it. First, the Fed ended its quantitative easing program long time ago, and it has been conducted recently quantitative tightening. Second, there is a lot of uncertainty around the effects of QE on interest rates. Hence, as the San Francisco Fed economists noted,

there is no clear evidence in the data that ‘this time is different’ or that forecasters should ignore part of the current yield curve flattening because of the presumed macro-financial effects of QE.

Second concern about the current predictive power of the yield curve refers to easy financial conditions. The inverted yield curve should reflect tightened financial conditions and desperate entrepreneurs scrambling for funds, bidding up short-term rates. But, as the chart below show, the financial conditions remain easy (negative values indicate financial conditions that are looser than average).

Chart 1: Yield curve (green line, spread between 10-year and 3-month Treasuries, monthly averages, in %) and the Chicago Fed National Financial Conditions Index (blue line, index) from January 1971 to June 2019.

That’s true. However, the financial conditions are very often a lagging indicator, as banks turn off the credit tap only after the crisis come. Liquidity is an illusory concept. It may seem to be abundant and always just there, but when market stress occurs, liquidity often disappears. Please take one more look at the chart above. The financial conditions become positive, i.e., tighter than on average, only in November 2007, just one month before the Great Recession officially began. And during the 2001 recession which occurred after the burst of the dot-com bubble, the financial conditions remained easy all the time!

Third, what about the reason behind the recent inversion of the yield curve? In the April edition of the Gold Market Overview, we pointed out that the March inversion of the yield curve happened not because the short-term interest rates rose abruptly, as the Fed tried to stop the overheating of the economy and prevent the rise of inflation, but because the long-term bonds yield declined, as investors became more pessimistic and started to expect interest rates to be lower in the future.

We were right. The immediate reason behind the March inversion was the drop in the long-term interest rates, as the chart below clearly shows. The same applies to the May inversion. Actually, that case was even more counterintuitive, as the short-term interest rates declined, not rose! The yield curve inverted because the long-term yields plunged even more.

Chart 2: Long-term interest rates (green line, 10-year Treasuries) and short-term interest rates (red line, 3-month Treasuries) from January 2015 to July 2019.

However, everything makes sense, when adopting a long-term view. So, let’s take a look at the next chart, zooming out the bond yields. As one can see, the long-term interest rates remain in the sideways trend, while the short-term interest rates increased substantially since 2015 when the Fed started its tightening cycle.

Chart 3: Long-term interest rates (green line, 10-year Treasuries) and short-term interest rates (red line, 3-month Treasuries) from January 2015 to July 2019.


 
Hence, everything fits the standard theory of the yield curve inversion. But even if it does not, it does not matter, actually. According to the San Francisco Fed’s paper we’ve already cited, inversion predicts slump, regardless of the driver. In other words, only the difference between the interest rates matters for recession predictions.

The bottom line is clear. The future cannot be guaranteed, but the past shows that each time the pundits reassured us that ‘this time is different’, they were wrong. As long as the yield curve remained flat but positive, we downplayed fearmongering about the imminent recession. When the yield curve inverted shortly in March, we were disturbed, but still far from panicking. But when the key spread, calculated on a daily basis, dived deeper into negative territory and for longer in May, while the monthly average inverted in June, we had to acknowledge that the recessionary odds in the US several months ahead increased substantially. Precious metals investors should act accordingly, adjusting their portfolios to the heightened risk of recession.  

If you enjoyed the above analysis, we invite you to check out our other services. We provide detailed fundamental analyses of the gold market in our monthly Gold Market Overview reports and we provide daily Gold & Silver Trading Alerts with clear buy and sell signals. If you’re not ready to subscribe yet and are not on our gold mailing list yet, we urge you to sign up. It’s free and if you don’t like it, you can easily unsubscribe. Sign up today!

Arkadiusz Sieron
Sunshine Profits‘ Market Overview Editor

Disclaimer

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

Arkadiusz Sieron Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules