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Outlook for Gold & Recession or No Recession?

By Claude Biava

April 24, 2008

The Outlook for Gold

The Japanese Yen tells the story. In mid March prices of Treasury bonds and notes peaked and turned down ending a buoyant rally that began in mid 2007 as the economy slowed down, the subprime credit crisis unfolded, and the Fed started a dramatic campaign of interest rates cuts. Synchronous with these events, a furious unwinding of the Japanese Yen carry trade produced one of the sharpest rallies ever seen in this currency. This rally also ended in mid March. Gold prices followed a similar pattern with a correlation that went largely unnoticed until recently. The earlier association of Gold with Oil prices and the Euro (see the GEOs) has been severed since the mid March peak as both Oil and Euro continued their advance to new highs. Whether this parting of their ways will be temporary or lasting remains to be seen (see An abrupt about face of the Gold Bull: reasons and consequences).

In Chart1 presented below, there is no mistaking the tight correlation between the Treasury 2 years Notes, the Japanese Yen, and the price of Gold. Since the Yen's rally is known to have been associated with the unwinding of the Yen carry trade, by inference it is plausible to think that the carry trade has resumed as the yield of the Treasury notes climbed back to above 2.0 %. Since mid March, this yield has risen from a cycle low of 1.46 to 2.2% and, together with other long maturity Treasuries, has produces a marked re-steepening of the Yield Curve (Chart 2). Gold is subject to a carry trade as much as the Yen (and to a lesser extent as the Swiss Frank) and therefore is negatively affected to a similar extent.

Due to these developments, Gold can be expected to remain under pressure until a new equilibrium is reached between rising rates and lower Gold prices. However, because of the multiple bullish factors favoring Gold, as reflected in the very bullish level of the Gold Barometer, this pressure is more likely to translate into a prolonged sideway price movement than in any severe decline.

In view of the relationships highlighted above, henceforth the short term outlook for Gold will be also evaluated by monitoring the behavior of the 2 years Treasury Note and the Yen (the GYN trio) in addition to the GEO trio.

Recession or No Recession?: A Ballo in Maschera

Amazing as it may seem, economic pundits and politicians are still debating whether or not the economy is in recession. President Bush, insists not. So did his father in the 1990 recession. We are neither pundits nor politicians. We just are not blind to the glaring evidence of recession, large portions of which have been routinely monitored and posted in the 1990 recession re-visited section of this site. One of these pieces has been the ABC-Washington Post Index of Consumer Comfort which was released yesterday with a reading of -40. The last time a similar low reading was registered clocks back to October 21, 1990, right at the depth of the 1990 recession (see Chart below) Like now, the recession at that time had yet to appear on the radar screen of most economists.

The main reason for the ongoing confusion is that Lady Recession, as featured on top of the page, is masked. The mask is made of several layers of cloth: growing emerging economies, booming industrial and agricultural commodities, prosperous energy sectors, depreciating US Dollar and robust export sectors among others.. We should be grateful but not over-complacent about this blurring of the recession reality since the Lady's mask thus far spared us from having an additional 20% decline of the stock market on top of the same decline we have already had.

So, prey that the Lady won't drop the mask, for it would expose a very ugly face!.

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