As the yield curve inverted for the second time in a year, the Coronavirus is spreading across China. Could the two prove to be enough to send gold soaring?
In 2019, the inversion of the Treasury yield curve was a major red flag that sparked concerns over an imminent recession in the U.S. The concerns can rightly be called justified, as yield curve inversions have historically served as a tell-tale sign that a crisis is coming. As Arkadiusz Sieron points out, the Federal Reserve promptly stepped in to boost the economy with three interest rate cuts within the span of 6 months.
Although the move ushered in a new norm of negative-yielding government bonds around the world, it appeared to remedy the situation – at least temporarily – as the yield curve normalized following the easing of domestic monetary policy. Yet latest developments hint that the economic issues are far from resolved, and that the triple rate cut may have only served to postpone an unavoidable crisis. Sieron notes that, despite the aforementioned cuts, the spread between 10-year and 3-month Treasuries again dipped into negative territory around the end of January.
While the dip was short-lived, Sieron believes that a second inversion so soon after such a heavy easing of monetary policy is a particularly bad sign for the economy moving forward. To make matters worse, the latest inversion comes not as a result of rising short-term interest rates, but rather a fall in long-term bond yields. The 10-year Treasury has been posting dismal showings for some time, and Sieron attributes the dip further below to investor concerns over the impact of the coronavirus outbreak on global growth, especially since growth started contracting before the outbreak.
As Sieron notes, the SARS epidemic ended up taking a $40 billion chunk out of the global economy and pushed investors into safe-haven assets. Now, the fading global economy faces a more dangerous contagion with far less haven options available, leading Sieron to think that the coronavirus could be the catalyst to send gold flying to $1,600 and above as many had been forecasting.
After all, the metal jumped to $1,580 almost immediately after the yield curve inversion, showing that worries over the threat of a recession are just as present as they were in 2019, when gold climbed around 20% within the 12-month period. Despite the yield curve’s normalization at the start of February, the metal remains perched just shy of $1,600 two weeks later. Whether it’s the worsening of the coronavirus outbreak, the likelihood of yet another yield curve inversion or one of the many other possible triggers, gold appears to have no shortage of tailwinds waiting in the winds to launch it to new heights.