Markets News & Opinions

This 70% Yield Curve Signal Says Buy Gold & Bitcoin, Sell Stocks

  • Research from Crescat Capital suggests now is the ideal time to buy gold.
  • The critical 70% inversion threshold has preceded all six of the last recessions.
  • Bitcoin has outperformed gold in every respect over the last ten years, although there is no data relating to recessions.

According to an in-depth analysis from Otavio Costa at Crescat Capital, now is the time to start accumulating gold.

Costa, a portfolio manager at the firm, observes that when average Treasury yield curve spreads exceed a critical 70% threshold, gold will outperform stocks over the ensuing two years.

Gold always outperforms stocks after a yield curve inversion. | Source: Twitter

The dreaded inverted yield curve reared its ugly head in August. And historically speaking, the leading indicator almost always reveals that a devastating recession is just around the corner.

Market tops are obviously incredibly difficult to time. But Costa shows that buying gold based on its ratio to the S&P 500 immediately after a yield curve inversion will net you somewhere in the region of 100% profit.

Recession – It’s Not a Matter of if But When

The current state of global economic troubles did not get its ‘Everything Bubble’ title for nothing. As Costa explains:

There is a laundry list of dangerous assets bubbles in the global financial markets today that have built up over a record long US economic expansion

Costa rattles off an exhaustive list of macro imbalances that would make any investor run for the hills. From a purely U.S. perspective, that key 70% level has preceded each of the last six recessions, without fail.

Percentage of US yield curve inversions which signal recession. | Source: Bloomberg

Of course, as mentioned previously, precisely timing such a shift from stocks to gold is either pure genius or sheer dumb luck.

Credit Suisse, for example, contends that 18 months is the actual sweet spot before stocks rollover. Their calculation, however, only appears to take into account the 2-10 curve.

Crescat’s analysis, on the other hand, calculated the average of all 44 yield curve spreads. And in all but one of the subsequent recessions, there was a stock market decline, three of which cratered by almost 50%.

Bitcoin Still a Massive Asymmetric Buying Opportunity

But what about bitcoin? Well, like most global macro asset management firms, the big boys are still reluctant to make any significant allocation into crypto.

As a result, Costa advocates that investors allocate not more than one to two percent of their portfolio to bitcoin.

Bitcoin is limited in supply like precious metals and in that sense could be a valuable call option on inflation.

Unfortunately, its short lifespan means there is no conclusive ratio we can call upon in the wake of an inversion.

Some have also argued that crypto is practically uncorrelated to traditional markets. Unless you call avocado price correlation a thing.

Despite a centuries-long fascination with gold, bitcoin still provides a massive asymmetric buying opportunity because of its potential parabolic returns.

In a mere ten years, the safest blockchain on the planet has already commanded a 4.5x premium on the yellow metal.

1 Bitcoin will buy you 4.5 ounces of gold | Source: TradingView

In the short-term, though, the flagship cryptocurrency continues to bleed out thanks to a recent sub $7,000 plunge.

That should nevertheless be good news to more sophisticated investors just waiting for the market to purge weak bulls on its way to $50,000.

Last modified: March 4, 2021 2:40 PM

Ryan Smith

Ryan hails from sunny South Africa. He is fascinated with the broken financial system that threatens to destabilize global markets. He has a keen interest in the history and evolution of money and is always trying to understand the bigger economic picture. When not meticulously looking over the charts, he can be found planning his next road trip or running the trails in his the local nature reserve. Gmail Twitter LinkedIn