The inverted yield curve as a harbinger of higher gold prices

The inverted yield curve as a harbinger of higher gold prices by Michael J. Kosares for USA Gold

(Grey vertical bars indicate recessions.)

During the course of the past few weeks, we have heard much about the inverted yield curve in three-month and ten-year Treasuries as a harbinger of recessions. Missed in the press reports is the fact that it has also been a harbinger of higher gold prices. In the chart above, please note the upward surges in the price of gold in the five-year periods following the two most recent yield inversions in 2000 and 2006.  The first occurred with gold trading in the $300 range.  It subsequently rose to the $600-650 level in 2006.  The second occurred with gold priced in the $600-650 range.  It subsequently rose to over $1900 per ounce in 2011 – its all-time high.

“Ominously,” writes Robin Wigglesworth and Joe Rennison in a recent Financial Times editorial, “the US yield curve has now inverted once again, with the 10-year Treasury yield on March 22 dipping below the three-month T-bill yield for the first time since 2007. Combined with the length of the post-crisis expansion — this summer it will become the longest growth spurt in US history — and deteriorating economic data, the inverted yield curve has stirred fears that the countdown to the next downturn has already begun.”

Peter Fisher, formerly head of fixed income at BlackRock and currently a professor at Tuck School of Business at Dartmouth, puts it succinctly in that same Financial Times editorial.  “The mistake,” he says, “is to think it [an inverted yield curve] is a predictor of recessions. I think it causes recessions.”  The rise in the price of gold following the two prior instances of yield inversion, it is now well understood, came in response to aggressive central bank monetary easing and the sudden emergence of credit-related systemic risks.

Fed and White House go to war over monetary policy

In an ideal world, the Fed would be above politics. The American political landscape these days, however, is far from ideal. Fed Chairman Powell migrated to a more dovish stance on monetary policy following the December stock market scare, but from President Trump’s perspective, that stance is not dovish enough.  “I personally think the Fed should drop rates,” Mr. Trump recently told White House reporters.  “I think they really slowed us down. There’s no inflation. I would say in terms of quantitative tightening, it should actually now be quantitative easing. You would see a rocket ship.”

Such a statement by itself would be enough under ordinary circumstances to motivate some judicious position adjustments on Wall Street’s trading desks. Mr. Trump, though, has upped the ante by offering up two Federal Reserve Board nominees – Stephen Moore and Herman Cain – known more for their hardened political sympathies than economic policy objectivity. That shift could send Wall Street speculators into overdrive as we enter the election season and simultaneously heighten gold’s safe-haven appeal.

The Federal Reserve Board of Governors looks to be on a path to becoming not just more politically inclined as the presidential election cycle draws near but highly politicized. The Fed’s reaction to the market retreat of last December has made it look indecisive and confused.  The White House, for its part, seems all too eager to shift the blame for any imminent slowdown to the Fed. The nation, as a result, finds itself in the unprecedented situation of witnessing the executive branch of government in outright conflict with its central bank.

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