Best of the Week
Most Popular
1. Investing in a Bubble Mania Stock Market Trending Towards Financial Crisis 2.0 CRASH! - 9th Sep 21
2.Tech Stocks Bubble Valuations 2000 vs 2021 - 25th Sep 21
3.Stock Market FOMO Going into Crash Season - 8th Oct 21
4.Stock Market FOMO Hits September Brick Wall - Evergrande China's Lehman's Moment - 22nd Sep 21
5.Crypto Bubble BURSTS! BTC, ETH, XRP CRASH! NiceHash Seizes Funds on Account Halting ALL Withdrawals! - 19th May 21
6.How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
7.AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
8.Why Silver Price Could Crash by 20%! - 5th Oct 21
9.Powell: Inflation Might Not Be Transitory, After All - 3rd Oct 21
10.Global Stock Markets Topped 60 Days Before the US Stocks Peaked - 23rd Sep 21
Last 7 days
Investing in Crypto Currencies With Both Eyes WIDE OPEN! - 25th Oct 21
Is Bitcoin a Better Inflation Hedge Than Gold? - 25th Oct 21
S&P 500 Stirs the Gold Pot - 25th Oct 21
Stock Market Against Bond Market Odds - 25th Oct 21
Inflation Consequences for the Stock Market, FED Balance Sheet - 24th Oct 21
To Be or Not to Be: How the Evergrande Crisis Can Affect Gold Price - 24th Oct 21
During a Market Mania, "no prudent professional is perceived to add value" - 24th Oct 21
Stock Market S&P500 Rallies Above $4400 – May Attempt To Advance To $4750~$4800 - 24th Oct 21
Inflation and the Crazy Crypto Markets - 23rd Oct 21
Easy PC Upgrades with Motherboard Combos - Overclockers UK Unboxing - MB, Memory and Ryzen 5600x CPU - 23rd Oct 21
Gold Mining Stocks Q3 2021 - 23rd Oct 21
Gold calmly continues cobbling its Handle, Miners lay in wait - 23rd Oct 21
US Economy Has Been in an Economic Depression Since 2008 - 22nd Oct 21
Extreme Ratios Point to Gold and Silver Price Readjustments - 22nd Oct 21
Bitcoin $100K or Ethereum $10K—which happens first? - 22nd Oct 21
This Isn’t Sci-Fi: How AI Is About To Disrupt This $11 Trillion Industry - 22nd Oct 21
Ravencoin RVN About to EXPLODE to NEW HIGHS! Last Chance to Buy Before it goes to the MOON! - 21st Oct 21
Stock Market Animal Spirits Returning - 21st Oct 21
Inflation Advances, and So Does Gold — Except That It Doesn’t - 21st Oct 21
Why A.I. Is About To Trigger The Next Great Medical Breakthrough - 21st Oct 21
Gold Price Slowly Going Nowhere - 20th Oct 21
Shocking Numbers Show Government Crowding Out Real Economy - 20th Oct 21
Crude Oil Is in the Fast Lane, But Where Is It Going? - 20th Oct 21
3 Tech Stocks That Could Change The World - 20th Oct 21
Best AI Tech Stocks ETF and Investment Trusts - 19th Oct 21
Gold Mining Stocks: Will Investors Dump the Laggards? - 19th Oct 21
The Most Exciting Medical Breakthrough Of The Decade? - 19th Oct 21
Prices Rising as New Dangers Point to Hard Assets - 19th Oct 21
It’s not just Copper; GYX indicated cyclical the whole time - 19th Oct 21
Chinese Tech Stocks CCP Paranoia, VIES - Variable Interest Entities - 19th Oct 21
Inflation Peaked Again, Right? - 19th Oct 21
Gold Stocks Bouncing Hard - 19th Oct 21
Stock Market New Intermediate Bottom Forming? - 19th Oct 21
Beware, Gold Bulls — That’s the Beginning of the End - 18th Oct 21
Gold Price Flag Suggests A Big Rally May Start Soon - 18th Oct 21
Inflation Or Deflation – End Result Is Still Depression - 18th Oct 21
A.I. Breakthrough Could Disrupt the $11 Trillion Medical Sector - 18th Oct 21
US Economy and Stock Market Addicted to Deficit Spending - 17th Oct 21
The Gold Price And Inflation - 17th Oct 21
Went Long the Crude Oil? Beware of the Headwinds Ahead… - 17th Oct 21
Watch These Next-gen Cloud Computing Stocks - 17th Oct 21
Overclockers UK Custom Built PC 1 YEAR Use Review Verdict - Does it Still Work? - 16th Oct 21
Altonville Mine Tours Maze at Alton Towers Scarefest 2021 - 16th Oct 21
How to Protect Your Self From a Stock Market CRASH / Bear Market? - 14th Oct 21
The Only way to Crush Inflation (not stocks) - 14th Oct 21
Why "Losses Are the Norm" in the Stock Market - 14th Oct 21
Sub Species Castle Maze at Alton Towers Scarefest 2021 - 14th Oct 21
Which Wallet is Best for Storing NFTs? - 14th Oct 21
Ailing UK Pound Has Global Effects - 14th Oct 21
How to Get 6 Years Life Out of Your Overclocked PC System, Optimum GPU, CPU and MB Performance - 13th Oct 21
The Demand Shock of 2022 - 12th Oct 21
4 Reasons Why NFTs Could Be The Future - 12th Oct 21
Crimex Silver: Murder Most Foul - 12th Oct 21
Bitcoin Rockets In Preparation For Liftoff To $100,000 - 12th Oct 21
INTEL Tech Stock to the MOON! INTC 2000 vs 2021 Market Bubble WARNING - 11th Oct 21
AI Stocks Portfolio Buying and Selling Levels Going Into Market Correction - 11th Oct 21
Stock Market Wall of Worry Meets NFPs - 11th Oct 21
Stock Market Intermediate Correction Continues - 11th Oct 21

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

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