Yesterday we reviewed still-cautionary signals. Today, let’s check out an important one that may be turning positive for gold.
Here is the 10yr-2yr yield curve, still inverted within its flattening trend, and thus, still negative for gold. But I am favoring the view that the early July inversion extreme was something of a re-test/double bottom to the March extreme, and a new steepener is grinding itself into existence.
With nominal yields still very elevated the signaling of this would-be steepener is inflationary, as we have speculated it would be, at least to start. I make a big deal about how gold is not a good inflation protector compared to commodities and some stock market sectors. But if it is accompanied by a rising yield curve it would theoretically be constructive because the implication is risk going ‘off’ into the short end of the Treasury market RELATIVE to the long end, where inflation concerns may be embedded and in a deflationary situation, where risk is higher than the liquidity of cash and short-term notes and bonds.
It’s complicated and sometimes confusing, but let’s boil it down to this…
- If we were right about the disinflationary Goldilocks signaling of the flattening curve (we were) and that was not positive for gold (it wasn’t) as it signaled ‘Fed in full control’…
- A steepening curve signals inflation and/or deflation and more importantly, ‘Fed not in full control’ and ‘confidence waning’, which would eventually grind out to a gold-positive view.
