Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Housing Market Analysis - Immigration Drives House Prices Higher - 30th Sep 24
Stock Market October Correction - 30th Sep 24
The Folly of Tariffs and Trade Wars - 30th Sep 24
Gold: 5 principles to help you stay ahead of price turns - 30th Sep 24
The Everything Rally will Spark multi year Bull Market - 30th Sep 24
US FIXED MORTGAGES LIMITING SUPPLY - 23rd Sep 24
US Housing Market Free Equity - 23rd Sep 24
US Rate Cut FOMO In Stock Market Correction Window - 22nd Sep 24
US State Demographics - 22nd Sep 24
Gold and Silver Shine as the Fed Cuts Rates: What’s Next? - 22nd Sep 24
Stock Market Sentiment Speaks:Nothing Can Topple This Market - 22nd Sep 24
US Population Growth Rate - 17th Sep 24
Are Stocks Overheating? - 17th Sep 24
Sentiment Speaks: Silver Is At A Major Turning Point - 17th Sep 24
If The Stock Market Turn Quickly, How Bad Can Things Get? - 17th Sep 24
IMMIGRATION DRIVES HOUSE PRICES HIGHER - 12th Sep 24
Global Debt Bubble - 12th Sep 24
Gold’s Outlook CPI Data - 12th Sep 24
RECESSION When Yield Curve Uninverts - 8th Sep 24
Sentiment Speaks: Silver Is Set Up To Shine - 8th Sep 24
Precious Metals Shine in August: Gold and Silver Surge Ahead - 8th Sep 24
Gold’s Demand Comeback - 8th Sep 24
Gold’s Quick Reversal and Copper’s Major Indications - 8th Sep 24
GLOBAL WARMING Housing Market Consequences Right Now - 6th Sep 24
Crude Oil’s Sign for Gold Investors - 6th Sep 24
Stocks Face Uncertainty Following Sell-Off- 6th Sep 24
GOLD WILL CONTINUE TO OUTPERFORM MINING SHARES - 6th Sep 24
AI Stocks Portfolio and Bitcoin September 2024 - 3rd Sep 24
2024 = 1984 - AI Equals Loss of Agency - 30th Aug 24
UBI - Universal Billionaire Income - 30th Aug 24
US COUNTING DOWN TO CRISIS, CATASTROPHE AND COLLAPSE - 30th Aug 24
GBP/USD Uptrend: What’s Next for the Pair? - 30th Aug 24
The Post-2020 History of the 10-2 US Treasury Yield Curve - 30th Aug 24
Stocks Likely to Extend Consolidation: Topping Pattern Forming? - 30th Aug 24
Why Stock-Market Success Is Usually Only Temporary - 30th Aug 24
The Consequences of AI - 24th Aug 24
Can Greedy Politicians Really Stop Price Inflation With a "Price Gouging" Ban? - 24th Aug 24
Why Alien Intelligence Cannot Predict the Future - 23rd Aug 24
Stock Market Surefire Way to Go Broke - 23rd Aug 24
RIP Google Search - 23rd Aug 24
What happened to the Fed’s Gold? - 23rd Aug 24
US Dollar Reserves Have Dropped By 14 Percent Since 2002 - 23rd Aug 24
Will Electric Vehicles Be the Killer App for Silver? - 23rd Aug 24
EUR/USD Update: Strong Uptrend and Key Levels to Watch - 23rd Aug 24
Gold Mid-Tier Mining Stocks Fundamentals - 23rd Aug 24
My GCSE Exam Results Day Shock! 2024 - 23rd Aug 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

Gold Bulls Are Impatient: Will They See a Recession in 2020?

Commodities / Gold & Silver 2020 Feb 01, 2020 - 12:33 PM GMT

By: Arkadiusz_Sieron

Commodities

Recession, recession - will we see one in 2020? And will it bring about a rally in gold then?. True or false? In today’s article, we’ll test the ‘recession in 2020’ narrative and we’ll then show you what it all means for the gold market.

One year ago, we wrote that “we do not expect recession next year or even in 2020”. We were right: the U.S. economy did not slide into a recession in 2019. But will it happen this year? After all, the current economic expansion lasts 127 months. We know that expansions do not die of old age, but we also know that the next economic crisis will one day arrive, sooner or later. Twelve months ago, we were skeptical about a downturn in 2020, as “the lack of clear typical warning signs that preceded the past recessions put the ‘recession in 2020’ narrative into question”.


However, we were quickly forced to change our stance and turn more cautious. In March 2019, the yield curve has inverted for the first time since 2007, while in May, the spread between long-term and short-term Treasuries went much deeper into negative territory. As the chart below shows, the yield curve ceased to be negative in October, but this does not negate the recessionary signal sent earlier. The milk has been spilled. When the genie flies out of the bottle, you can’t just push it back.

Chart 1: Spread between 10-Year Treasury Constant Maturity and 2-Year Treasury Constant Maturity (red line, in %) and spread between 10-Year Treasury Constant Maturity and 3-Month Treasury Constant Maturity (blue line, in %) from January 2019 to December 2019.

Actually, just as important as when the yield curve inverts is when it becomes positive again. Historically speaking, the reinversion of the yield curve signaled the eased upward pressure on short-term interest rates due to the bankruptcies of the companies that needed funds most desperately. Based on data from the last two recessions, the next economic crisis should appear within four to six months from turning positive, i.e., between February and April 2020. However, this time, the yield curve become positive again because the Fed worried about potential economic problems and cut interest rates in advance. So, this time, recession could arrive later that the yield curve suggests. 

And what about other recessionary indicators? Well, the unemployment rate is still at record lows, as the chart below shows. It has not started increasing, so it does not signal recession. Neither Sahm’s index, which is based on the unemployment rate (we described that indicator in detail in the July edition of the Market Overview), predicts recession right now.

Chart 2: US unemployment rate from January 2015 to November 2019.

Moreover, the financial conditions remain easy and the financial market stress below average, as the chart below shows, while the credit spreads stay low. It means that the sharp tightening in financial conditions in late 2018 has now fully reversed, which reduces the odds of a financial crisis.

Chart 3: The Chicago Fed National Financial Conditions Index (red line, index) and St. Louis Fed Financial Stress Index (blue line, index) from January 2015 to December 2019

On the other hand, the smoothed recession probabilities for the United States (we have detailed this model in detail in the July edition of the Market Overview) have increased recently. As one can see in the chart below, the spike at the end of the chart reflects the rise in recession probability from 0.38 percent in August to 9.90 percent in October 2019.

Chart 4: Smoothed recession probabilities for the US from January 2000 to October 2019.

To be clear, the odds are still very low. However, such a sudden, big jump is intriguing, or even disturbing. And investors should remember that the probabilities of recession are available only with a two-month delay. Anyway, if the upward trend continues and the recessionary odds jump above 20 percent, the next economic downturn might be then just around the corner.

Summing up, the gold bulls are waiting for the U.S. recession. The yield curve inversion in 2019 signals economic downturn in 2020 or early 2021. So far, the yield curve has been the most powerful recessionary indicator, so the precious metals investors should not downplay it.

However, other indicators – such as the unemployment rate or measures of financial conditions – do not confirm the recessionary call. Actually, the phase one trade deal with China could ease some concerns and revive investment spending, putting off the recession. So, gold bull could have to wait for a rally in the yellow metal a bit longer.

Thank you.

If you enjoyed the above analysis and would you like to know more about the link between the U.S. economy and the gold market, we invite you to read the August Market Overview report. If you're interested in the detailed price analysis and price projections with targets, we invite you to sign up for our Gold & Silver Trading Alerts . If you're not ready to subscribe at this time, we invite you to sign up for our gold newsletter and stay up-to-date with our latest free articles. It's free and you can unsubscribe anytime.

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

© 2005-2022 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