Is Widening Yield Curve Inversion Lifting Gold Prices Up?

The yield curve inversion just got more pronounced. Not only the spread between 10-year and 3-month Treasuries but now also the spread between 10-year and 2-year turned negative. That sends a warning signal about the state of the real economy. About a recession on the horizon. Some might argue that the yield curve's predictive power has diminished with all the unorthodox monetary policies since the Great Recession. Yet, it's a valid reason to worry - how does gold welcome this message?

Inversion Gets Wider

The U.S. Treasury yield curve inversion is getting wider. We have been reporting on the inverted yield curve since May when the spread between the 10-year and 3-month debt instruments turned negative. Now, the spread between the 10-year and 2-year Treasuries joined the infamous club. Please take a look at the chart below.

(Click on image to enlarge)

Chart 1: Spread between 10-year and 3-month Treasuries (red line) and between 10-year and 2-year Treasuries (green line) in 2019.

The daily data does not reveal the inversion, but the difference between 10-year and 2-year bonds temporarily fell to a negative 1 basis point on Wednesday. The chart shows that this spread plunged to 0.01 percent and that a permanent inversion is only a matter of time. What this chart also presents is that the spread between 10-year and 3-month Treasuries got even bigger, diving below negative 0.35.

This is all very disturbing. The inversion of the 10-Year/2-Year spread strengthens the recessionary signal sent earlier by the inversion of the 10-year/3-Month spread. The inversion of one spread could be caused by some specific or peculiar factors, but the inversion of two spreads excludes any random factors, which means that the situation is turning really grave. Inversions in crucial segments of the yield curve have almost always preceded recessions. Fundamentally, it's great news for the gold bulls, as investors who believe an inverted yield curve is a bad omen for the economy may reach for precious metals.

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If you enjoyed the above analysis and would you like to know more about the most important macroeconomic factors influencing the U.S. dollar value and the price of gold, we invite you to read the ...

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