Gold Bulls Are Impatient: Will They See a Recession in 2020? / Commodities / Gold & Silver 2020

Recession, recession - will wesee one in 2020? And will it bring about a rally in gold then?. True or false?In today’s article, we’ll test the ‘recessionin 2020’ narrative and we’ll then show you what it all means for the gold market.

One year ago, we wrote that “we do not expectrecession next year or even in 2020”. We were right: the U.S. economy did notslide into a recession in 2019. Butwill it happen this year? After all, the current economic expansion lasts127 months. We know that expansions do not die of old age, but we also knowthat the next economic crisis will one day arrive, sooner or later. Twelve months ago, we were skeptical about adownturn in 2020, as “the lack of clear typical warning signs that preceded thepast recessions put the ‘recession in 2020’ narrative into question”.

However, we were quickly forced to change ourstance and turn more cautious. In March 2019, the yield curve has inverted for the firsttime since 2007, while in May,the spread between long-term and short-term Treasuries went much deeper intonegative territory. As the chart below shows, the yield curve ceased to benegative in October, butthis does not negate the recessionary signal sent earlier. The milk has been spilled.When the genie flies out of the bottle, you can’t just push it back.

Chart 1: Spread between 10-Year Treasury ConstantMaturity and 2-Year Treasury Constant Maturity (red line, in %) and spreadbetween 10-Year Treasury Constant Maturity and 3-Month Treasury ConstantMaturity (blue line, in %) from January 2019 to December 2019.

Actually, justas important as when the yield curve inverts is when it becomes positive again.Historically speaking, the reinversion of the yield curve signaled the easedupward pressure on short-term interest rates due to the bankruptcies of thecompanies that needed funds most desperately. Based on data from the last tworecessions, the next economic crisis should appear within four to six monthsfrom turning positive, i.e., between February and April 2020. However, thistime, the yield curve become positive again because the Fed worried aboutpotential economic problems and cut interest rates in advance. So, this time, recession could arrive laterthat the yield curve suggests. 

And what about other recessionary indicators? Well,the unemployment rate is still at record lows, as the chart below shows.It has not started increasing, so itdoes not signal recession. Neither Sahm’s index, which is based on theunemployment rate (we described that indicator in detail in the July edition ofthe Market Overview), predicts recession right now.

Chart 2: US unemployment rate from January 2015 toNovember 2019.

Moreover, the financial conditions remain easy andthe financial market stress below average, as the chart below shows, while thecredit spreads stay low. It means that the sharp tightening in financialconditions in late 2018 has now fully reversed, which reduces the odds of a financial crisis.

Chart 3: TheChicago Fed National Financial Conditions Index (red line, index) and St. LouisFed Financial Stress Index (blue line, index) from January 2015 to December2019

On the other hand, the smoothedrecession probabilities for the United States (we have detailed this model in detail in the Julyedition of the Market Overview) have increased recently. As one can see in thechart below, the spike at the end of the chart reflects the rise in recession probability from 0.38 percent in Augustto 9.90 percent in October 2019.

Chart 4:Smoothed recession probabilities for the US from January 2000 to October 2019.

To be clear, the odds are still very low. However, such a sudden, big jump is intriguing, oreven disturbing. And investors should remember that the probabilities ofrecession are available only with a two-month delay. Anyway, if the upward trend continues and the recessionary odds jump above 20 percent, the next economicdownturn might be then just around the corner.

Summing up, the gold bulls are waiting for the U.S.recession. The yieldcurve inversion in 2019 signals economic downturn in 2020 or early 2021. Sofar, the yield curve has been the most powerful recessionary indicator, so the precious metals investors should notdownplay it.

However, other indicators – such as theunemployment rate or measures of financial conditions – do not confirm therecessionary call. Actually, the phase one trade deal with China could ease some concerns and revive investmentspending, putting off the recession. So, goldbull could have to wait for a rally in the yellow metal a bitlonger.

Thank you.

Ifyou enjoyed the above analysis and would you like to know more about the linkbetween the U.S. economy and the gold market, we invite you to read the August MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron

Sunshine Profits‘ MarketOverview Editor

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