The Precious Metals Week in Review – March 18th, 2022

1. Market volatility continued this week as the U.S. Federal Reserve held its Federal Open Market Committee meeting to set monetary policy. Russia continues to be mired down in the aftermath of its decision to carry out an invasion of Ukraine nearly one month ago, with its army struggling to make key milestones in its attempt to take over the country and its economy now in shambles.

2. For the week ending March 12, the seasonally adjusted number of Americans filing initial claims for unemployment decreased by 15,000 from the previous week’s revised level to reach a new level of 214,000. The previous week’s level was revised higher by 2,000 claims. The 4-week moving average of claims was 223,000, a decrease of 8,750 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 500 claims.

3. The U.S. Federal Reserve’s Federal Open Market Committee met this week and the group of Fed officials decided that it was indeed time to begin raising interest rates. The Fed decided to carry out a 25 basis point hike to interest rates, this quarter point is its first hike to interest rates in three years. Officials indicated that the Fed would take an aggressive path to combat surging inflation, which has only gotten worse in the wake of the Ukraine-Russia war, and will potentially be raising rates at each of the six remaining FOMC meetings in 2022. The group also sees a need for at least three additional rate hikes in 2023. James Bullard, St. Louis Fed President, and the only dissenter among committee members, wanted a 50 basis point hike instead. In its post-meeting statement, the FOMC said it “anticipates that ongoing increases in the target range will be appropriate. In addition, the Committee expects to begin reducing its holdings of Treasury securities and agency debt and agency mortgage-backed securities at a coming meeting.” Fed Chair Jerome Powel hinted that the balance sheet reduction could begin in May and the result of that reduction could effectively amount to at least one additional rate hike.

4. Fed Governor Christopher Waller told CNBC on Friday that the central bank may be forced to enact at least one half-percentage point rate hike in the months ahead, if not more than one. Waller voted for this week’s 25 basis point move but said “I really favor front-loading our rate hikes, that we need to do more withdrawal of accommodation now if we want to have an impact on inflation later this year and next year. So in that sense, the way to front-load it is to pull some rate hikes forward, which would imply 50 basis points at one or multiple meetings in the near future.” Speaking further on the Fed’s bloated balance sheet, Waller said “We’re in a different place than we were before. We have a much bigger balance sheet, the economy’s in a much different position. Inflation is raging. So, we’re in a position where we could actually draw down a large amount of liquidity out of the system without really doing much damage.” Discussing why he did not vote for a 50 basis point hike this week along with his colleague James Bullard, Waller said “The data’s basically screaming at us to go 50, but the geopolitical events were telling you to go forward with caution. So those two factors combined pushed me off of advocating for a 50 basis point hike and supporting the 25-point hike that we enacted.”

5. S&P Global Mobility downgraded its 2022 and 2023 global light-duty vehicle production forecast by 2.6 million units for both years this week, citing Russia’s invasion of Ukraine as the cause for the drop in automobile production. The research firm, which was formerly known as IHS Markit, said that the conflict in Ukraine has exacerbated logistical and supply chain problems and triggered shortages of critical vehicle components. Apparently most auto manufacturers source their wire harnesses from Ukraine. European automakers are expected to be affected the most by the disruption. On Friday, the auto industry was hit again when Toyota announced that it was suspending operations at over half of its plants across Japan for three days next week due to supply problems caused by an earthquake earlier in the week. Renesas, a manufacturer that makes nearly one third of the microcontroller chips that are used around the world in automobiles, also announced it had been forced to shut down some plants that were close to the epicenter of the quake that struck northeast Japan. Renesas said it is attempting to restart the plants and hoped to return them to pre-earthquake production levels by Wednesday at the latest.

6. Inflation continues to outpace wage gains, meaning that even though workers are bringing home more in their paychecks, that additional money is not enough to offset the rising costs of everyday goods like food, gas, and energy. Discussing the issue, Yiming Ma, an assistant finance professor at Columbia University Business School said “It’s very difficult to fully evade inflation. Certain types of spending can be postponed, but everyone needs to eat, and everyone needs to go to work.” Mark Hamrick, a senior economic analyst at Bankrate.com said “Indeed, surging prices are stealing the show on the minds of consumers. People do not buy food staples, gasoline, or electricity because they love these things; they buy them because they need them.” According to a report by Credit Karma, which polled over 2,000 adults in February, it found that “two-thirds of American workers say their pay is not adequate to cover the rising cost of inflation.” Another report by LendingClub found that nearly 64% of the U.S. population is now living paycheck to paycheck.

7. U.S. Secretary of State Antony Blinken, speaking on behalf of President Joe Biden, said on Thursday that he believes Russian forces have committed war crimes in Ukraine. Blinken said “President Biden said that, in his opinion, war crimes have been committed in Ukraine. Personally, I agree. Intentionally targeting civilians is a war crime. After all the destruction of the past three weeks, I find it difficult to conclude that the Russians are doing otherwise.” Earlier on Wednesday, President Biden called Russian President Vladimir Putin a “war criminal”, the first time that Biden has publicly stated such a thing. White House press secretary Jen Psaki said Wednesday, when questioned about Biden’s remarks, that the President was “speaking from his heart” but noted that there is a separate legal process that is underway to determine whether Putin has violated international law and indeed carried out actions that can be considered war crimes. Also on Wednesday the United Nations top court, the International Court of Justice, ruled in favor of Ukraine in its efforts to stop the ongoing invasion and ordered Russia to immediately suspend its ongoing war. Russia has rarely paid heed to findings by the International Court of Justice and shows no signs of intending to do so now.

8. Skyrocketing gas prices have forced ride service companies Uber and Lyft to add a fuel surcharge to each transaction to assist their drivers with the added costs. Walmart and Doordash have also added fuel surcharges as the national average for gasoline reached as high as $4.33 per gallon. Wednesday morning, roughly 50 delivery and ride-share drivers parked their vehicles outside an Amazon warehouse near Los Angeles, displaying signs that said “Running on Empty. We Can’t Afford Gas. Tech Giants, Pay Up.”

9. President Joe Biden outlined on Wednesday how the U.S. will spend $800 million in military and humanitarian aid for Ukraine that was approved after he signed a new spending package into law this week, promising to “do more in the days and weeks ahead.” The funds are destined toward 800 antiaircraft systems, 9,000 antiarmor systems, 7,000 small-arm machine guns, in addition to grenade launchers and shotguns. Some of the funds will also be used to assist some of the more than 3 million Ukrainians that have now been displaced by the war. Biden said “This new package on its own is going to provide unprecedented assistance to Ukraine. May God protect the Ukrainians who are out there defending their country.”

10. U.S. Retail Sales rose 0.3% in February, missing expectations for a 0.4% climb as inflation took a bite out of consumer spending. Excluding autos, sales were up only 0.2%, which was far below expectations for a 0.9% rise ex-autos. Sales for gasoline surged as consumers tried to beat further price hikes by gas stations while, oddly, online spending appears to have plunged. Non-store sales, which are representative of online shopping, were down 3.7%.

11. Oil prices continued their brief pause this week, posting a second straight weekly loss despite volatile trading during the week. A 9% surge in Brent and an 8% surge in WTI on Thursday, followed by a continued rally on Friday kept oil over the $100 per barrel mark for the week, however. Brent crude ended the week at $107.93 per barrel while West Texas Intermediate crude futures settled at $104.70 per barrel

12. The euro bounced in a narrow channel between positive and negative against the U.S. dollar as the market opened for trading this week. By Monday morning, the euro had pushed its way back into positive territory, experiencing some peaks and troughs all the way through late Tuesday. Late on Tuesday, the euro began a mostly steady move to the upside that saw the battered currency touch its highs for the week late on Thursday. After touching its highs for the week, the euro came off a bit, dipping lower overnight and through much of Friday’s trading. A brief bounce to the upside just prior to market closing will see the euro close out the week slightly to the upside against the U.S. dollar.

13. The Japanese yen spent nearly the entire week moving lower against the U.S. dollar. The yen attempted to reverse course on Tuesday, spiking briefly higher, but had resumed its downward trend by late in the day. The yen dropped lower through Wednesday, but then attempted another reversal again all throughout Thursday. The yen started moving lower again overnight Thursday and had touched a 6 year low against the dollar just prior to market close on Friday. The yen did bounce slightly higher just prior to the close, but it will still finish out the week to the downside against the U.S. dollar.

Geopolitical tensions continue to drive market volatility as Russia’s invasion of Ukraine entered its fourth week. Several missiles hit an aircraft repair center on the outskirts of Lviv in western Ukraine, according to the city’s mayor. Lviv has thus far avoided any sort of hostilities and many Ukrainians fleeing active combat areas had fled there. The new strikes seem to suggest that Russia is widening its range of attacks again. Despite the widening of attacks, U.K. intelligence said on Friday that Russia’s forces have made “minimal progress this week.” The British Ministry of Defence said “Ukrainian forces around Kyiv and Mykolaiv continue to frustrate Russian attempts to encircle the cities. The cities of Kharkiv, Chernihiv, Sumy and Mariupol remain encircled and subject to heavy Russian shelling.”

Russia narrowly managed to avoid defaulting on its external debt obligations this week. The Kremlin had until the end of business on Wednesday to pay $117 million in interest on two Eurobonds that are denominated in U.S. dollars. Had they failed to make the payment, it could have meant that Russia would have seen its first foreign currency debt default in more than 100 years. The sanctions imposed against Russia for its actions in Ukraine have blocked much if its gold and foreign exchange reserves from being useable. Russia’s Finance Ministry however, said Friday that the London branch of paying agent Citi, a U.S. bank, had received $117 million in total payments. Holders of two Russian dollar bonds said that the coupon payments arrived on Thursday, well within the 30-day payment grace period allowed under the terms of the bonds. Credit rating agency S&P downgraded Russia’s foreign and local currency sovereign credit ratings to “CC” from “CCC,” citing a “high vulnerability” to debt nonpayment. The agency said, “Although public statements by the Russian Ministry of Finance suggest to us that the government currently still attempts to transfer the payment to the bondholders, we think that debt service payments on Russia’s Eurobonds due in the next few weeks may face similar technical difficulties.” An exemption to some of the sanctions that the U.S. has placed upon Russia that apparently allowed for the payments to be made is set to expire on May 25 and Russia may face even more difficulties meeting its debt obligations following that event.

As Russia carries out its ongoing shelling in Ukraine, geopolitical tensions will likely continue to trigger even more market volatility. Russia continues to accuse the U.S. of backing biochemical weapons laboratories in Ukraine, going so far as to call a special session of the U.N. Security Council to level its accusations before the United Nations. U.S. Ambassador to the UN Linda Thomas-Greenfield accused Russia of abusing its power to convene the Security Council and countered Russia’s accusations, saying “It is Moscow that has long maintained a biological weapons program in violation of international law, not Ukraine. It is Moscow that has a well-documented history of using chemical weapons, not Ukraine. And it is Moscow that started the senseless war. Russia is abusing [its] responsibilities and privileges as a permanent member of the Security Council.”

An earthquake in Japan is likely to add to the already mounting disruptions to global supply chains, particularly in the automotive sector. The war in Ukraine is also affecting the auto industry as many of its parts such as wire harnesses and fabrics for interiors come from the region. Inflation should be expected to surge further as the effects of the Ukraine-Russia war continue to make their way through global markets. The U.S. Federal Reserve’s quarter point rate hike this week is likely just the beginning, as the central bank becomes aggressive in its efforts to fight off massive inflation. Investors continue to try to ensure that their portfolios are sufficiently diversified against market volatility and corrections. During times of high inflation and both geopolitical and economic uncertainty, physical precious metals have seen a long history of retaining their value and many investors have once again chosen to add physical precious metals to their portfolio as part of their diversification plans. Remember that the key to profitability through the ownership of physical precious metals is to acquire the physical product and hold it for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long run.

Trading Department – Precious Metals International, Ltd.

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