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

Yield Curve Flashes Recession Alert! Better Times for Gold?

Commodities / Gold and Silver 2022 Nov 06, 2022 - 09:50 PM GMT

By: Arkadiusz_Sieron

Commodities The key yield curve has inverted, shouting loudly that a recession is coming - and with it, better times for gold.

I activated the high-degree recession alert! I’ve been writing about the downturn for some time, but in October, another important indicator flashed a red light. As you can see on the chart below, the key yield curve has inverted.





Earlier this year, the spread between 10-year and 2-year US Treasury bonds (the red line) turned negative. In April, it timidly fell below zero for a while, but in July it did it again and with greater boldness, remaining since then in negative territory. Commenting on this event, I wrote:

This is a very important development, as it strengthens the recessionary signal sent by the April curve. The previous reversal was very brief and shallow – and thus not very reliable. But the second inversion within just four months implies that dark clouds are indeed gathering over the US economy.

I also added one important caveat about drawing too far-reaching conclusions about the recessionary prospects:

The more important spread between 10-year and 3-month US Treasuries hasn’t yet turned negative. However, it has flattened significantly since May, plunging to a level close to zero, and – after the next hikes in the federal funds rate – it could invert as well.

Well, this is what happened last month. As the chart above shows, the spread between 10-year and 3-month US Treasuries (blue line) fell below zero on October 18 (to -0.03%) and later on October 25 (to -0.4%), joining the club of negative spreads.

The inversion of this yield curve is a huge development, as it strengthens the recessionary signals sent by the 10-year and 2-year curves in April and June. Please remember that the 10-year and 3-month spread is believed to offer the highest accuracy and predictive power among all possible bond yields. As the chart below shows, this spread has turned negative before each recession in the 1982-2020 period (the research conducted by the New York Fed confirms this feature also for the earlier years, until 1968).



It means that each US economic downturn in the last five decades has been preceded by the inversion of this yield curve, and each fall below zero has been followed by the recession. In other words, as the inversion in this particular yield curve correctly predicted each of the last eight recessions without giving any false alarms, it makes it the most reliable recessionary indicator in modern economic history. It’s true that investors don’t have a crystal ball, but the yield curve is the next best thing they can use.

What’s also important is that the reason behind the recent inversion is not the decline in long-term yields but the increase in the 3-month Treasury yield, as the chart below shows. To be precise, both yields have risen recently, but the short-term yields simply climbed higher. Why? Well, the Fed’s tightening cycle and input price inflation made entrepreneurs and investors scramble for the funds needed to finish their investment projects. As they compete for liquidity and the Fed hikes the federal funds rate, short-term interest rates go up.



What does it all mean for the gold market? Well, the increase in the bond yields won’t help the gold prices – it can actually send them lower. However, the recessionary signal sent by the yield curve is clearly bullish for gold. If the predictive power of the yield curve remains in force, a recession is very likely to arrive by the end of 2023, as it historically used to follow the inversion of the yield curve after four quarters (or sometimes more). Hence, gold should also shine at some point in the near future. As the chart below shows, inversions of the yield curve have not only preceded recessions but also rallies in gold prices.



To be clear, what is positive for gold is not the inversion of the yield curve. Gold goes up together with the steepening of the yield curve, which happens when short-term rates decline. It occurs when the Fed smells a recession and starts to cut interest rates. In other words, gold needs the Fed’s pivot to reverse its downward trend. It’s a matter of time – some analysts believe that the January hike will be the last in this cycle – a recession is already on the way. The adoption of a more neutral stance by the Fed, which is quickly approaching, should allow gold to catch its breath and prepare for the future rally.

Thank you.

If you enjoyed the above analysis and would you like to know more about the gold ETFs and their impact on gold price, we invite you to read the April 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