The Role of Yield Curve in Gold and Silver Investing

 August 25, 2017   Niel Retief   English, Gold

As an investor, it’s important to understand the role of the yield curve in general. When it comes to investing in gold and silver, it’s especially important to understand how the yield curve specifically applies.

In this article, we’re going to walk you through the role of the curve in investing, so that you can make the best investments possible.

Let’s take a look at what you need to know.

What Is a Yield Curve?

The yield curve is an economic indicator showing how different interest rates relate.

This curve usually compares bonds that have the same credit quality but different maturity dates. It allows you to see how bonds with different maturities yield.

The longer the maturity, the higher the yield tends to go. Most curves will have a positive slope because of this.

There are three basic curve shapes that can occur:

  1. Inverted
  2. Flat
  3. Normal.

Let’s take a closer look at what these curves.

Normal Curve

In the normal curve, bonds with a longer maturity are yielding more than the short-term bonds. This curve has an upward slope.

Normal curves indicate times of economic expansion.

Flat Curve

When the curve is flat, the yields for short and long-term bonds have become almost indistinguishable. This can happen when a normal curve is transitioning to an inverted curve or vice versa.

A flat curve indicates that economic change is about to occur.

The change may be positive or negative. It is effectively a transition state: either a normal or inverted curve must transition through a flat curve before it can change.

Inverted Curve

When the curve is inverted, the short-term bonds are yielding more than the long-term ones.

Both inverted and flat curves are signals that economic change is likely to occur. However, an inverted curve means that a recession is likely to happen.

The best-known yield curve is the U.S. Treasury curve. This curve compares the three-month, two-year, five-year and 30-year U.S. Treasury debt.

Other debt can be measured against this curve, giving a picture of economic changes as well as rates for mortgages or lending.

The Role of Curves in Gold and Silver Investing

Understanding this economic indicator will help you in your gold and silver investing.

Changes in the U.S. Treasury curve can help you understand the gold and silver market. When the price of gold or silver is compared to the Treasury’s curve, you can get a bigger investment picture.

That said, there is not always a clear correlation between the Treasury curve and the price of gold or silver. It takes a closer look to really understand how to use the Treasury curve in your investing.

The Role of a Normal Curve

Because a normal curve means a normal economic environment, prices of gold are unlikely to rise very much when you see a normal yield curve. That is unless other factors are at play.

The Role of a Flat Curve

Flat curves tend to cause gold and silver prices to rise, since the flattening of the curve signals impending economic changes.

It can be helpful to know why the curve is flattening, though. If the country has been in recession for years, a flattening curve likely indicates economic growth. This can mean that the price of gold may not necessarily rise, or won’t stay high for very long.

The Role of an Inverted Curve

At times when the yield curve becomes inverted – that is, long-term yields have fallen below short-term yields – a recession is often about to happen. A chain reaction then occurs.

People prepare for the economic slowdown in many ways. Entrepreneurs start fighting for increasingly limited resources so they can fully fund their projects. Creditors will start to accept yields that are smaller.

The upshot of all this is that gold and silver prices are likely to rise. People will be looking to invest in gold and silver as part of their preparation for an impending economic downturn.

How to Use the Yield Curve

It’s important to pay attention to the curve for your gold and silver investing since there is a correlation between the shape of the U.S. Treasury curve and the price of gold.

However, the correlation tends to be weak, since many other factors also affect the price of gold and silver.

Remember that the curve is measuring the entire economy.

It doesn’t give the most accurate information about gold and silver prices since that’s not what it’s intended to measure. It’s just one useful part of the picture.

The inversion of the curve does, however, very accurately predict an economic recession. This can mean that gold and silver prices rise, but it doesn’t always.

In fact, a flattened or inverted curve doesn’t always mean rising gold and silver prices, even when a recession does occur. Gold prices tend to rise when an economic downturn is combined with other factors, like quantitative easing.

There are many different factors that change and affect prices. Keep up with all of those factors, including the shape of the yield curve, and you will enjoy successful investing.

Wrapping It All Up

When the economy changes, people often look to gold and silver as ways of securing their financial future.

If you’re looking to invest in gold and silver now, a normal yield curve might indicate that you’ll be able to do so more cheaply. If you’re thinking of selling, it may make sense to wait for a flattened or inverted curve.

However, if investing was that easy there would be nothing to it!

The curve only gives you part of the story. There are many other elements that factor into the cost of gold and silver.

Always remember that entire picture, taken as a whole, dictates when it’s a good time to buy, and when it’s better to sell.

Got any questions? Be sure to reach out and talk to us. That’s exactly what we’re here for!

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