Is Coronavirus the Black Swan That Takes Gold To-Da-Moon? / Commodities / Gold & Silver 2020

Amid the worries about the coronavirus and its impacton the global economy, the US yield curve has briefly inverted again.Recession, anyone? And what exactly does the inversion imply for the goldmarket?

Yield CurveInverts Again

Ooops, it happened again – the yield curve has inverted! Please takea look at the chart below. It shows that at the turn of January and February, the spread between 10-year and 3-monthTreasuries has dived below zero once again. It stayed below zero only for acouple of days before moving back into the positive territory. The inversionwas shallow as the level of the spread did not plunge below minus 0.4.

Chart 1: Spread between 10-year and 3-month Treasuriesfrom January 1, 2019, to February 5, 2020.

However, the fact that the yield curve has invertedagain after the October 2019 normalization, is of great importance. It shows that the underlying forces behindall the 2019 inversions are still in force. It shows that the Fed’s easing of monetary policy did not heal theeconomy. The US central bank cut interest rates three times in 2019,partially because of the worries about the inversion of the yield curve.Initially, it seemed that these cuts helped, as the yield curve reinverted inOctober and stabilized in the positive territory for a few months. But now itshould be clear that the Fed just postponed the inevitable. We meanhere, of course, recession. We still do not know whenexactly the next economic crisis comes – otherindicators suggest the US economy remains strong – but the latest inversion ofthe yield curve shows that therecessionary fears are still justified, despite the temporary calming down.But, as we all know, it’s always calm before the storm. 

Coronavirusand Yield Curve

Now, let’s dig deeper into the cause behind the recentinversion of the yield curve. Please take a look at the chart below. As you cansee, the yield curve has inverted this time not because of the rise in theshort-term interest rates, but becauseof the drop in the long-term bond yields.

Chart 2: 10-year Treasuries (green line) and 3-monthTreasuries (red line) from March 2019 to February 2020.

It show that investors worry about the prospects ofthe global growth amid the coronavirus outbreak. Theseconcerns about the negative impact of the virus on the world’s trade and paceof economic growth pushed investors from the stock market into safe-haven assets such as thelong-term government bonds. After all, the impact on the global economy fromthe SARS epidemic reached up to $40 billion, according to this research, but ascoronavirus is more contagious, its economic costs may be higher.

So, althoughthe short-term interest rates did not spike, which could tighten financialconditions and trigger recession, theinversion of the yield curve is still positive for the gold prices.Investors expect that the growth will slow down or/and that the Fed will cutthe federal funds rate again laterthis year. Indeed, traders bet that the UScentral bank will deliver one cut in July, but they have also increased theirbets on two cuts.

Implications for Gold

When thespread between 10-year and 3-month Treasuries bottomed out, the price of goldjumped above $1,580. And the current fears about coronavirus may support it inthe short-term. However, as we wrote on Monday, fears about previous virusoutbreaks were overblown in hindsight. Therefore, the current anxiety may be only temporary. The yield curve hasalready reinverted (but another inversion is probable) while the stock marketshook off the fears and rebounded. Hence, don’t necessarily expect gold pricesskyrocketing. However, the yellow metal performed greatly in 2019 due to therecessionary fears. So, if they settle in again on a more permanent basis, gold bulls would get an ally.

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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