What an Inverted Yield Curve Means for Gold



Flattening yield curve

The yield curve tracks the yields of Treasury securities maturing at different times. For example, the yield of two-year securities (SHY) is usually lower than that of ten-year securities (IEF)(TLT). The narrowing gap between these yields is sometimes called a “flattening yield curve.” If shorter-term security yields become larger than longer-term security yields, that’s called a “yield curve inversion” (BND). Yield curve inversion is a concern for some bond traders and investors, as it suggests upcoming recessions with fairly high accuracy.

Economy to weaken?

On December 3, part of the US Treasuries yield curve inverted for the first time since the recession, with the spread between five- and three-year Treasury yields narrowing to -0.01 percentage points. The most-watched spread, the spread between two- and ten-year Treasury yields, also narrowed to its lowest level since 2007.

During an interview with Reuters, DoubleLine CEO Jeffrey Gundlach said the current inversion of the yield curve (TLT) could signal that the US (SPY)(IVV) “economy is poised to weaken.”

Gundlach added that the recent equity recovery could be at risk due to fundamental economic deterioration, which is “a message that is sounding from the junk bond market, whose rebound has been far less impressive.”

Yield curve and gold

Historically, the relationship between the inversion of the yield curve and gold (JNUG)(GLD) has been all over the place, but the main message for gold from this pattern could be that uncertainty is growing after an unusually calm 2017 and 2018. Amid increased market uncertainty, investors look for safe-haven assets—including precious metals, increasing their demand.

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