Reverse yield curve again. Will the gold shine now?

Another inversion of the yield curve occurs

It really gets more serious. Another inversion of the yield curve … And a much deeper question: it's scary!

As you probably thinkIn March 2019, the yield curve reversed for the first time after the crisis. The reversal was mild and short lived. And this happened after the Fed sent a dovish signal, not a hawkish one, as it announced a longer pause in tightening monetary policy and the end of its downsizing last September.

So we concluded in the Gold News Monitor (right here and right here) that the March reversal did not fit the classic story when the Fed raises the problem in the short term interest rate combat inflationdid not report the upcoming recession, especially since the unemployment rate (as well as other indicators) did not confirm the warning. We were right, the sky did not fall and the price of gold did not start to rise again.

But maybe we will have to change our minds. You can blame the table below, which is really disturbing. It shows the difference between 10-year and 3-month treasury bills. Take a look!

As can be seen, after a brief reversal in March, the yield curve returned to the positive zone and remained there throughout the month of April. However, in mid-May, the yield curve was found in the negative. On May 13, the gap fell to -0.01, but the reversal ended the next day. On May 15, however, the yield curve reversed at -0.05, but ended the following day. But since May 23, the yield curve is reversed again. And this time, the inversion is much deeperwhen the gap fell to -0.16.

So, this is the fourth inversion since March, which indicates that negative gaps may not be short-lived after all. And not so sweet either. Previously, spreads were not below -0.05, while the current difference has dropped below -0.15. As a result, the situation could be more serious than before, but despite the fact that the economic data seems solid overall, the other warning signs of the recession are simply not there.

Effectively, the alarm tones sound louder not only on the US bond market, but also around the world. German 10-year yields plunged into a new record, well below zero. The yield curve in the UK is around its flatter level since Great recession, while the Canadian yield curve has already reached the 2007 inversion level.

Implications for gold

In the end, the yield curve reversed. This should add to fears of recession, which is a back wind for the yellow metal in the near future. Indeed, as shown in the chart below, gold prices rose Monday to their highest level in more than two months. There seems to be some concern about a global recession – fueled in part by commercial wars – pushed investors into safe haven assets such as gold.

Should we press the panic button? From one side, an inverted yield curve preceded every US recession since the Second World Warso we should not assume that this moment will be different. On the other hand, quantitative easing interventions by other central banks in the bond markets could really diminish the predictive power of the yield curve. Other recession indicators (including yield curves measured differently) do not blink red, at least not yet. And the reversal is caused by the 10-year yield decline rather than the 3-month yield increase.

We do not send a red alert yet. We will examine in detail the most recent reversal of the yield curve in the next edition of Market overview and let us know our verdict on the matter! For the moment, the precious metals investors should become more cautious, that's for sure (but they should not panic!). If the yield curve is still an indicator of confidence in our era of expanded monetary policy toolbox, we are probably about four-six quarters away from the US recession. If we are on this dark path, this partly explains the growing attraction of gold. The important word here is – so …

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Thank you.

Arkadiusz Sieron

Sunshine Profits' Gold News Monitor and Market overview Editor

Warning: Please note that the purpose of the analysis above is to discuss the likely long-term impact of the phenomenon described on the price of gold and that this analysis does not indicate ( and is not intended to do so) if gold will probably go up or up. weaker in the short or medium term. To determine this last factor, many additional factors must be taken into account (sentiment, graphs, cycles, indicators, ratios, similar patterns, etc.) and we take them into account (and discuss strategies in the short and medium term ). long-term prospects) in our commercial alerts.

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