Most Popular
1. Banking Crisis is Stocks Bull Market Buying Opportunity - Nadeem_Walayat
2.The Crypto Signal for the Precious Metals Market - P_Radomski_CFA
3. One Possible Outcome to a New World Order - Raymond_Matison
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
5. Apple AAPL Stock Trend and Earnings Analysis - Nadeem_Walayat
6.AI, Stocks, and Gold Stocks – Connected After All - P_Radomski_CFA
7.Stock Market CHEAT SHEET - - Nadeem_Walayat
8.US Debt Ceiling Crisis Smoke and Mirrors Circus - Nadeem_Walayat
9.Silver Price May Explode - Avi_Gilburt
10.More US Banks Could Collapse -- A Lot More- EWI
Last 7 days
Keep Calm and Carry on Buying Quantum AI Tech Stocks - 19th Feb 24
How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - 17th Feb 24
Why Rising Shipping Costs Won't Cause Inflation - 17th Feb 24
Intensive 6 Week Stock Market Elliott Wave Training Course - 17th Feb 24
INFLATION and the Stock Market Trend - 17th Feb 24
GameStop (GME): 88% Shellacking Yet No Lesson Learned - 17th Feb 24
Nick Millican Explains Real Estate Investment in a Changing World - 17th Feb 24
US Stock Market Addicted to Deficit Spending - 7th Feb 24
Stocks Bull Market Commands It All For Now - 7th Feb 24
Financial Markets Narrative Nonsense - 7th Feb 24
Gold Price Long-Term Outlook Could Not Look Better - 7th Feb 24
Stock Market QE4EVER - 7th Feb 24
Learn How to Accumulate and Distribute (Trim) Stock Positions to Maximise Profits - Investing 101 - 5th Feb 24
US Exponential Budget Deficit - 5th Feb 24
Gold Tipping Points That Investors Shouldn’t Miss - 5th Feb 24
Banking Crisis Quietly Brewing - 5th Feb 24
Stock Market Major Market lows by Calendar Month - 4th Feb 24
Gold Price’s Rally is Normal, but Is It Really Bullish? - 4th Feb 24
More Problems in US Regional Banking System: Where There's Fire There's Smoke - 4th Feb 24
New Hints of US Election Year Market Interventions & Turmoil - 4th Feb 24
Watch Consumer Spending to Know When the Fed Will Cut Interest Rates - 4th Feb 24
STOCK MARKET DISCOUNTING EVENTS BIG PICTURE - 31st Jan 24
Blue Skies Ahead As Stock Market Is Expected To Continue Much Higher - 31st Jan 24
What the Stock Market "Fear Index" VIX May Be Signaling - 31st Jan 24
Stock Market Trend Forecast Review - 31st Jan 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