The term spread is upside down, and history is always repeating itself. Term interest rate upside down refers to that in the interest rate increase cycle, economic expectations are pessimistic, the growth rate of interest rate at the long end lags behind that at the short end, and the term structure tends to flatten or even upside down. By combing the six term interest rate reversals that the United States has experienced since 1980, the economic downturn is usually accompanied by one to two years after each round of interest rate reversals. From the recession after previous reversals, the average lag of GDP bottoming is about 18.7 months, and the term interest rate reversals reflect the lack of vitality in the economic growth of the United States, which is the pre signal of the economic recession of the United States, and the return of the dollar and the rise of interest rates caused by the increase of interest rates, It has a great impact on the economic development of developing countries and often leads to global economic recession or economic crisis.
The upside down of term spread is accompanied by loose monetary policy. In the late stage of interest rate hike, as the long-term and short-term interest rate spread gradually narrowed until upside down, the economy gradually showed signs of slowdown. In order to maintain economic stability, the Federal Reserve usually stops raising interest rates within 3-6 months after the upside down of term interest rate spread, so as to turn to easing. It can be seen that after four spreads upside down from 198812 to 1990320002 to 200012200512 to 2007620198, the Federal Reserve started the process of reducing the target interest rate of federal funds in June 1989, January 2001, September 2007 and September 2019 respectively, which is 6, 11, 21 and 1 months behind the start time of spreads upside down respectively, and the average start time of interest rate reduction lags behind the start time of spreads upside down by about 9.8 months.
Gold assets performed well during the period of upside down of term spread. After the interest rate increase, the nominal interest rate will rise. The higher interest rate will put pressure on the valuation of the stock market. At the same time, the market’s expectations for the slowdown of economic growth are also rising, triggering the arrival of the inflection point of US stocks. The average start time of interest spread inversion is about 7.8 months ahead of the callback time of US stocks. U.S. stocks peaked under pressure, and there is usually an inflection point in the trend of gold and gold stocks.
Recession expectations may restrict interest rate hikes, and the time for gold allocation is coming. At the beginning of this round of fed interest rate hike cycle, the 10-year-2-year interest rate difference showed signs of upside down compared with early April 2022. According to the analysis of historical experience, it reflected the expectation of economic recession, and the US economic growth index showed signs of weakness. At present, in the environment of inflation continuing to exceed expectations, the hawkish monetary policy of the Federal Reserve may face a dilemma, and the number of interest rate increases implemented six times in the year is likely to peak. We believe that the expectation of interest rate hike has been fully reflected by the market, the bond trading results have reflected the expectation of economic recession, and the weakening of the fundamentals of the US economy may continue to curb the process of interest rate hike. If the interest rate hike is less than expected, the upward pressure on gold prices will be greatly reduced, and there will be an upward situation of inflation, but the upward rise of nominal interest rate is less than expected, the real interest rate will further decline, and gold will go out of a round of upward market, Maintain the “recommended” rating of the industry.
Key recommendations: Zhaojin mining industry, Chifeng Jilong Gold Mining Co.Ltd(600988) , Yintai resources, Shandong Gold Mining Co.Ltd(600547) .
Risk tip: metal prices fell sharply; The project progress of the company is less than expected; Production safety risks; Political risks in countries where overseas mines are located.
