Breaking News
Get Actionable Insights with InvestingPro+: Start 7 Day FREE Trial Register here
Investing Pro 0
Ad-Free Version. Upgrade your Investing.com experience. Save up to 40% More details

Yield Curve Inverts. It’s Time For Gold To Turn Back

By Sunshine Profits (Arkadiusz Sieron)CommoditiesAug 05, 2022 02:09PM ET
www.investing.com/analysis/yield-curve-inverts-its-time-for-gold-to-turn-back-200628138
Yield Curve Inverts. It’s Time For Gold To Turn Back
By Sunshine Profits (Arkadiusz Sieron)   |  Aug 05, 2022 02:09PM ET
Saved. See Saved Items.
This article has already been saved in your Saved Items
 

The yield curve has spoken: a recession is coming. Everything indicates that it will make gold shine.

It Happened Again

Have you ever wondered what the yield curve’s favorite song is? Neither have I, but I bet that in July it was Britney Spears’ hit, Oops, I Did It Again!

Indeed, the yield curve inverted again last month, for the second time in 2022. It means that long-term rates fell below those on shorter-dated bonds.

As the chart below shows, the spread between 10-year and 2-year U.S. Treasuries fell below zero for the first time this year at the beginning of April. However, it was a very short inversion, which lasted only two days, but on July 6, the yield curve inverted again – and this time it was more lasting.

10-Year-2-Year Treasury Spread.
10-Year-2-Year Treasury Spread.

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

Why? There are two explanations for the yield curve’s inversion.

According to the first one, more mainstream, inversion means that investors expect higher rates now and lower rates in the future, as they believe that the Fed’s tightening cycle will lead to a recession.

The second interpretation is offered by the Austrian school of economics. It says that because of input price inflation and the tightening of the Fed’s monetary policy, entrepreneurs and investors are simply scrambling for funds, as they are in a liquidity shortage, which bids short-term interest rates up.

Which one is true? Well, as the chart below shows, the yield curve has clearly inverted because of the rise in the 2-year Treasury yield, which fits nicely with the Austrian boom and bust cycle theory.

U.S. Treasury Yields in 2021-2022.
U.S. Treasury Yields in 2021-2022.

However, why should we worry about the yield curve’s inversion?

Well, as the chart below shows, the inversion of the yield curve has been historically a very powerful recessionary signal. As one can see, it preceded all recessions since 1976. For example, the yield curve inverted in February 2000, in parallel with the burst of the dot-com bubble and about one year before the official beginning of a recession. The spread also turned negative in mid-2006, several months before the Great Recession, and in August 2019, just around the repo crisis, which would lead to another recession even if the coronavirus crisis didn’t occur. There was a false signal sent by the yield curve, but only one, when the curve inverted in mid-1998.

Should we believe the yield curve this time?

Well, it’s possible that we’ll avoid a recession this time. After all, despite the slowdown in GDP growth, the labor market remains tight and the unemployment rate stays at a very low level. The more important spread between 10-year and 3-month U.S. Treasuries hasn’t yet turned negative, as the chart below shows. However, it has flattened significantly since May, plunging to a level close to zero, and it may invert as well after the next hike in the federal funds rate.

Another issue is that since COVID-19, we have lived in exceptional times, so traditional indicators might not work properly now. However, this is something the pundits say each time the yield curve inverts: this time it’ll be different. Yeah, for sure! I’ve heard many justifications why we shouldn’t worry about the yield curve’s inversion in 2019. Each time it turned out that the yield curve was right and the pundits – wrong. In 2019, there was a repo crisis and a standard recession was on the way – the only reason it didn’t occur was the introduction of the Great Lockdown and the emergence of the coronavirus recession.

What does it all mean for the gold market?

Well, in the immediate future, not much. In fact, the increase in the short- to medium-term bond yields could be negative for the yellow metal. However, in the more distant future, the inversion of the yield curve bodes well for gold. After all, it means that the recession is coming, and gold tends to shine during economic crises. Also, during an economic downturn, the Fed is likely to reverse its hawkish stance. When the Fed stops raising interest rates and starts to cut them, gold should rally again.

Gold Prices in 2022.
Gold Prices in 2022.

The analogy might be the 2018-2020 period. The Fed hiked the federal funds rate for the last time during its previous tightening cycle in December 2018. In July 2019, it started to cut its policy rates. As the chart above shows, the Fed’s dovish U-turn made gold soar. The same may happen this time. However, gold bulls should still be prepared for some pain – the Fed hasn’t said the last hawkish word.

Yield Curve Inverts. It’s Time For Gold To Turn Back
 

Related Articles

Yield Curve Inverts. It’s Time For Gold To Turn Back

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with other users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind:  

  •            Enrich the conversation, don’t trash it.

  •           Stay focused and on track. Only post material that’s relevant to the topic being discussed. 

  •           Be respectful. Even negative opinions can be framed positively and diplomatically. Avoid profanity, slander or personal attacks directed at an author or another user. Racism, sexism and other forms of discrimination will not be tolerated.

  • Use standard writing style. Include punctuation and upper and lower cases. Comments that are written in all caps and contain excessive use of symbols will be removed.
  • NOTE: Spam and/or promotional messages and comments containing links will be removed. Phone numbers, email addresses, links to personal or business websites, Skype/Telegram/WhatsApp etc. addresses (including links to groups) will also be removed; self-promotional material or business-related solicitations or PR (ie, contact me for signals/advice etc.), and/or any other comment that contains personal contact specifcs or advertising will be removed as well. In addition, any of the above-mentioned violations may result in suspension of your account.
  • Doxxing. We do not allow any sharing of private or personal contact or other information about any individual or organization. This will result in immediate suspension of the commentor and his or her account.
  • Don’t monopolize the conversation. We appreciate passion and conviction, but we also strongly believe in giving everyone a chance to air their point of view. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
Comments (4)
Roger Pruzansky
Roger Pruzansky Aug 07, 2022 3:39AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
all your scams are a joke at this point for away your wasting your time here now.
laurent Eliane
laurent Eliane Aug 06, 2022 2:10AM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
this time...collapse of euro , pounds....
jason xx
jason xx Aug 05, 2022 4:01PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
The curve has been inverted for 6 weeks now. Nobody wants paper gold
Samer Diab
Samer Diab Aug 05, 2022 2:53PM ET
Saved. See Saved Items.
This comment has already been saved in your Saved Items
wrong analysis. recessions always happen when the 10 year 3 months yield spread inverts. it is a far better indicator. it reached 0.04 and went higher just like 1998. thus until now mo recession . also gold doesn't always rally in a recession
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email