Curve upside down! Early-warning indicators of economic recession: Gold soars again in an all-round way

category:Finance
 Curve upside down! Early-warning indicators of economic recession: Gold soars again in an all-round way


The three-month and 10-year Treasury yield spreads, which were highly concerned in the global market, once reached 36 basis points. And hanging upside down has lasted for nearly two months. Meanwhile, the yield curves of the major Western economies, such as Britain, Canada and Germany, all show an inverted trend, which shows the consistent expectations of the market for a global recession.

On August 7, Peter Navarro, the White House trade and economic adviser, called on the Federal Reserve to cut interest rates further by the end of 2019 by 75 or 100 basis points to keep interest rates in line with those of other countries. The spread between us is too big to hurt our jobs. Currently, the target range of the federal funds rate in the United States is 2% to 2.25%.

Gold has hit a six-year high in recent days, boosted by expectations of interest rate cuts by major central banks around the world, such as the Federal Reserve, and rising demand for safe haven. On the morning of August 7, Comex gold futures prices exceeded $1500 an ounce for the first time since April 2013. On the 7th day, the Peoples Bank of China released data showing that the central bank has increased its gold holdings for eight consecutive months.

The whole U.S. yield curve is about to hang upside down

The 10-year Treasury bond yield represents the long-end interest rate and the 3-month Treasury bond yield represents the short-end interest rate. On August 6, the three-month and 10-year Treasury bond yields reached 36 basis points at one time.

In the short run, the curve appeared five basis points for the first time on March 27 and two on May 15, but after June, the curve showed an inversion phenomenon for a long time. On August 6, the degree of inversion further increased to 36 basis points. This is also the first time since 2006 - 2007.

Historically, the upside-down yield curve of US Treasury bonds has been the leading indicator of economic recession in the United States. Since 1970, every upside-down yield curve indicates that the U.S. economy will enter a recession in 1-2 years. In particular, the 10-year Treasury yield represents the long-end interest rate, and the 3-month Treasury yield represents the short-end interest rate. When this curve hangs upside down, the guiding significance is more obvious.

Statistics show that since 1970, although the magnitude, duration and lead time of each curve inversion are different, the U.S. economy has subsequently fallen into recession.

Even from June 1989 to December 1989, when the curve was reversed by only 18 basis points, the U.S. economy was still in recession nine months later.

At present, in addition to the three-month and 10-year Treasury bond yields hanging upside down, the 65% Treasury bond yield curve has also appeared hanging upside down. This situation has appeared in two world-class economic crises in 2006 and 1999.

Major Western economies are experiencing curve inversion in succession

It is noteworthy that the three-month and 10-year Treasury bond yield curve upside down not only in the United States, but also in some major Western economies. For example, Canada, the United Kingdom, Germany, Italy, France and other countries have appeared and are about to appear curve upside-down situation, showing the consistent expectations of the global economy into recession.

As shown below, Canadas three-month and 10-year Treasury yield curves have been upside down.

As shown below, Germanys three-month and 10-year bond yield curves have been upside down.

As shown below, the three-month and 10-year Treasury yield curves in the UK are nearly inverted.

From the above data of six major Western economies, including the United States, the trend of inversion of the yield curve is obvious, the market for the global economy peaks and falls, and the expectation of future recession is significantly strengthened. Of course, it should be reminded that term spreads upside-down and economic recession are not one-way relations, but interaction; without a long term term spreads upside-down, it is difficult to produce a lasting economic recession; on the contrary, without a lasting economic recession, term spreads upside-down is likely to be a flash in the pan.

On August 7, Peter Navarro, the White Houses trade and economic adviser, called for a further cut in interest rates by the end of 2019 by 75 or 100 basis points to keep interest rates in line with those of other countries. The spread between us is too big to hurt our jobs. Currently, the target range of the federal funds rate in the United States is 2% to 2.25%.

Later, on the evening of the 7th, President Trump again bombarded the Federal Reserve in the social media. He said the Fed must cut interest rates more dramatically and faster. Trump said the problem was that the Fed was too proud to admit that it had made the mistake of tightening too quickly and too heavily. The Federal Reserve must immediately stop its absurd quantitative austerity policy.

Previously, despite the joint voice of four former Fed chairmen on August 5, the Fed had to be free from short-term political pressure. But Yellen, the former chairman of the Federal Reserve, said on July 29 that she supported the Federal Reserve to cut its benchmark interest rate by 25 basis points because the global economy was weakening and US inflation remained low.

Standing on $1,500, hedge funds are keen on gold

Gold has hit a six-year high in recent days, boosted by expectations of interest rate cuts by major central banks around the world, such as the Federal Reserve, and rising demand for safe haven. On the morning of August 7, Comex gold futures prices exceeded $1500 an ounce for the first time since April 2013. Meanwhile, silver has recently hit a new high since 2016.

Gold prices have risen like a rainbow in the past week. As of July 30, speculators and fund managers had a one-week bullish mood for gold at a four-week high, according to a position report by the Commodity Futures Trading Commission (CFTC). Investorsnet long positions in COMEX gold futures and options increased by 13848 to 231 365 contracts.

After the Federal Reserve announced its interest rate resolution, gold fell to its lowest level since mid-July, but with the new tariff policy of US President Trump adding enormous uncertainty to the global trade situation, market expectations of the Feds continued interest rate cuts rebounded, the dollar weakened, and hedging sentiment pushed gold to a new high.

According to the latest World Gold Association Gold Demand Trend Report, global gold demand grew to 1,123 tons in the second quarter of 2019. With data from the first quarter of this year, gold demand grew to 2,181.7 tons in the first half of 2019, an 8% increase over the previous year.

The Peoples Bank of China (PBC) released data on July 7th that the central bank increased its gold holdings for eight consecutive months. Meanwhile, the global central bank purchased 224.4 tons of gold in the second quarter of this year, bringing the total amount of gold purchased by the central bank to 374.1 tons in the first half of this year, which is the largest half-year increase in the global official gold reserve in the 19-year quarterly historical data of the World Gold Association.

Another key driving force behind the rise in global gold demand is the gold ETF. Data show that global gold ETF holdings grew by 67.2 tons in the second quarter of this year, setting a six-year high in total stocks, of which the total size of gold ETF in Europe reached a record high of 1184 tons.