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Yield Curve Inversion – Good for Gold

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A yield curve gives us an idea of future interest rate changes and economic activity. In the US, this curve is at its widest spread since the financial crisis, which is an alarming situation as it has previously signalled forthcoming recessions.

This is not the first time that the curve has inverted this year; it also happened in March after the Federal Reserve announced a much longer than expected pause in tightening of monetary policy. Furthermore, yield curves around the world have plunged to new record lows, making these worries even more significant. It is important to understand that it is not just about whether the curve is inverted or not, but also how long for. In previous periods the longer the curve remained in a steady inverted state the more positive the outlook for gold became.

Fears of a recession is potentially one of the reasons why gold has risen in recent weeks; this paired with the threat of an intensifying global trade war is forcing investors to look for safe havens such as gold.

Throughout the last few decades we have seen that gold performs well during periods of an inverted yield curve. It may be premature to call a US recession, but the negative news keeps piling up. Following its initial rally, the gold price is now consolidating just as we had predicted and written about over the last two weeks. Once it settles further and if conditions remain the same, we would expect gold to perform well in the coming period.

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