gold market - investment & analysis


The Message of Yield Curve Inversion for the Economy and Gold

August 2, 2019, 2:54 AM Arkadiusz Sieroń , PhD

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The pundits have been predicting recession for years. Just like a shepherd boy, they have continuously cried the wolf. Many investors were convinced that there was a recession just around the corner, but there wasn't. The boy's pranks (the gloomy forecasts of economists) were a false alarm and those who believed them, made the type I error, i.e., they incorrectly rejected the null hypothesis that there is no wolf (recession).

But what is now crucial is to not commit the type II error. In the fable, when a wolf actually appears and the boy again calls for help, the villagers believe that it is another false alarm, so they do not come to the boy's aid and the wolf eats the sheep. The villagers incorrectly accepted the null hypothesis that there is no wolf. Similarly, although the pundits were constantly wrong crying the recession for years, investors should not shrug it off when it actually arrives. While a recession does not eat sheep (as far as we know), it can consume your capital and deplete your wealth.

This is why in this edition of the Gold Market Overview, we take the possibility of the U.S. recession in 2020 seriously. After summarizing and drawing conclusions from the gold market in the first half of 2019, we examine thoroughly the inversion of the yield curve. In particular, we analyze in detail its history and whether its predictive power has diminished or not. The yield curve has inverted not only on a daily basis, but also on a monthly basis which smooths out the daily volatility. Therefore, we acknowledge that the recessionary risk has increased further. We'll then explore together what it means for the gold prices, investigating also how well did the yellow metal perform in pre-recessionary periods.

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