Advertise | Bookmark | Contact Us | E-Mail List |  | Update Page | UraniumSeek.com 

Commentary : Gold Review : Markets : News Wire : Quotes : Silver : Stocks - Main Page 

 GoldSeek.com >> News >> Story  Disclaimer 
 
Latest Headlines

Of What Am I Now Certain?
By: Avi Gilburt

October Doesn't Disappoint: Volatility Is Back After a Tranquil Third Quarter
By: Frank Holmes

Lower Yields Are Bulls' Best Bet
By: Rick Ackerman

Asian Metals Market Update: Oct 16 2018
By: Chintan Karnani, Insignia Consultants

Gold Seeker Closing Report: Gold and Silver Gain While Stocks Drop Again
By: Chris Mullen, Gold Seeker Report

Ira Epstein's Metals Video 10 15 2018
By: Ira Epstein

The ultimate financial crisis will be inflationary
By: Steven Saville

Bombshell Guest: Stephen Leeb Predicts 3-Digit Silver and 5 Digit Gold?!
By: Mike Gleason

SWOT Analysis: Gold on Its Best Run in Six Weeks
By: Frank Holmes

You Canít Eat Gold
By: Keith Weiner

 
Search

GoldSeek Web

 
Gold Bulls: Donít Count on Yield Curve


 -- Published: Friday, 14 September 2018 | Print  | Disqus 

Are we going to fall into the trap of a self-fulfilling prophecy? Could investors trigger recession only because they are so worried about inversion of the yield curve? We invite you to read our todayís article about the yield curve and find out whether the popularity of the yield curve as an indicator of recession will bring on the recession that everyone is so afraid of.

 

In the last edition of the Market Overview, we have discussed whether gold investors should worry about the yield curve. Or should they keep their fingers crossed for its inversion? We concluded that not necessarily, as its predictive power has weakened and it doesnít say anything about the timing of recession.

 

However, the yield curve theory of recession has become extremely popular. Itís so hot topic that even Congressmen have been asking the Fed Chair about it in recent times, in particular Chairman Powell on July the 17th and the 18th. So the key question arises: if investors are so afraid of the inversion, is it possible that it will eventually cause recession? It might be an objectively wrong predictor, but if investors believe that it is the right indicator, will they not start selling assets, triggering correction, or even recession?

 

In other words: can we fall into the trap of a self-fulfilling prophecy? What is it? As American sociologist Robert K. Merton defined, it is initially ďa false definition of the situation evoking a new behavior which makes the original false conception come true The key here is the observation that peopleís actions are determined not only by the actual reality, but also by its perceptions and expectations. For example, if people are convinced that the war is inevitable, they can start it, fulfilling the prophecy. Or if people expect inflation tomorrow, they can buy goods today, which boosts prices, creating an inflationary spiral. Or, if people are certain that the inversion of the yield curve will bring recession, they can stop investing in risky assets or even start selling them in anticipation of the crash. If investors do it en masse, they can bring on the recession they were so afraid of!

 

Although it seems convincing, there are some problems with that approach. First of all, psychology is a powerful driver of the human behavior, but we shouldnít neglect the objective reality. Expectations and beliefs donít come out of nowhere. The war cannot outbreak without the real hostility. Inflation cannot emerge without too many dollars chasing too few goods. Recession cannot start without the liquidation of the wrong investments.

 

Are entrepreneurs guided by the slope of the yield curve? I doubt it. You see, the yield curve is just a symptom. Itís not an independent factor. It is the curve, which depicts the yields of securities of different maturities. So itís a result of myriad investment decisions undertaken by traders acting in distinct segments of the interest rate structure.

 

Another problem is that if people are supposed to anticipate the inversion of the yield curve and act accordingly earlier, why couldnít they anticipate that and act even earlier? Or, if everyone talks about the yield curve, shouldnít it be already priced in?

 

We are not saying that it is not a relevant factor for investment decisions (it is, especially for financial intermediaries), but it shouldnít be analyzed in isolation and in abstraction of the broader context. Instead, we should look at the underlying drivers. Such as? Oh, we donít know, maybe the Fedís actions? Usually, the yield curve inverts when the Fed tightens, as it increases the short-term interest rates relatively to the long-term yields. But the crucial thing is that the recession occurs when the central bank tightens too much. A lot of bad can be said about the Fed, but its monetary policy remains too loose rather than too tight.

 

Just take a look at the chart below, which shows the effective federal funds rate since 2003, enabling us to compare the current tightening cycle with the previous one. As one can see, the Fed ended lowering rates in mid-2003 and kept them unchanged for a year. It started to lift them up in June 2004 and continued hiking them until July 2006. In that, the US central bank raised rates from 1.00 to 5.25 percent, which means an increase of 4.25 percentage points over two years. It translates into an average hike of 16 basis points each month.  

 

Chart 1: Effective Federal Funds Rate from January 2003 to July 2018.

http://www.goldseek.com/news/2018/9-14as.png

 

Meanwhile, after the Great Recession, the Fed kept the interest rates unchanged for seven years. And it raised the target from 0-0.25 percent in December 2015 to 1.75-2.00 percent currently. It implies an increase of 1.75 percentage points in 33 months, or 5 basis points per month, which is ridiculously little (if we add two more hikes in 2018, the average goes up to 6 basis points, still not a very impressive number).

 

The conclusion is clear. The yield curve might inverse in the near future. And people may overreact to that. In the short-run, it could support gold as the save-haven asset. But it might be also the case that the markets will just shrug the inverted yield curve off. As the media sow fear about the potential disastrous effects, when the actual event finally comes, nobody cares about it. Think about North Korea or trade wars. The same might happen with the yield curve, which will be rather negative for the gold prices. Anyway, although we remain long-term gold bulls, the medium-term outlook for the yellow metal is unfavorable. The yield curve is not likely to change it.

 

Thank you.

 

Arkadiusz Sieron

Sunshine Profits - Free Gold Analysis

* * * * *

All essays, research and information found above represent analyses and opinions of Przemyslaw Radomski, CFA and Sunshine Profits' associates only. As such, it may prove wrong and be a subject to change without notice. Opinions and analyses were based on data available to authors of respective essays at the time of writing. Although the information provided above is based on careful research and sources that are believed to be accurate, Przemyslaw Radomski, CFA and his associates do not guarantee the accuracy or thoroughness of the data or information reported. The opinions published above are neither an offer nor a recommendation to purchase or sell any securities. Mr. Radomski is not a Registered Securities Advisor. By reading Przemyslaw Radomski's, CFA reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Przemyslaw Radomski, CFA, Sunshine Profits' employees and affiliates as well as members of their families may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.

 


| Digg This Article
 -- Published: Friday, 14 September 2018 | E-Mail  | Print  | Source: GoldSeek.com

comments powered by Disqus



 



Increase Text SizeDecrease Text SizeE-mail Link of Current PagePrinter Friendly PageReturn to GoldSeek.com

 news.goldseek.com >> Story

E-mail Page  | Print  | Disclaimer 


© 1995 - 2018



GoldSeek.com Supports Kiva.org

© GoldSeek.com, Gold Seek LLC

The content on this site is protected by U.S. and international copyright laws and is the property of GoldSeek.com and/or the providers of the content under license. By "content" we mean any information, mode of expression, or other materials and services found on GoldSeek.com. This includes editorials, news, our writings, graphics, and any and all other features found on the site. Please contact us for any further information.

Live GoldSeek Visitor Map | Disclaimer

The views contained here may not represent the views of GoldSeek.com, its affiliates or advertisers. GoldSeek.com makes no representation, warranty or guarantee as to the accuracy or completeness of the information (including news, editorials, prices, statistics, analyses and the like) provided through its service. Any copying, reproduction and/or redistribution of any of the documents, data, content or materials contained on or within this website, without the express written consent of GoldSeek.com, is strictly prohibited. In no event shall GoldSeek.com or its affiliates be liable to any person for any decision made or action taken in reliance upon the information provided herein.