Short and Sweet

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Yield inversions as a harbinger of recessions and higher gold prices

Source:  St. Louis Federal Reserve [FRED]
(The grey bars indicate recessions.)

During the course of the past several months, 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 following the three most recent yield inversions in 1989, 2000 and 2006.  Those price rallies, it is now well understood, came in response to aggressive central bank stimulus intended to beat back the ill effects of the recessions that followed in 1990, 2001 and 2008.

In recent months, as shown in the chart, the yield differential between the ten-year and three-month Treasury yield has again pinched to zero. After briefly recovering at the end of the year, it dropped to the zero line again a few weeks ago. Note, as well, the sudden rise in the price of gold from the time the inversion first made its appearance in May of last year – a more than 20% increase.

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