The Precious Metals Week in Review – April 8th, 2022

1. Market volatility continued as the Russia-Ukraine war entered its seventh week. Comments from Federal Reserve officials this week seemed to spook markets as analysts pondered what may be a far more hawkish Fed in the coming months than anyone expected. World leaders continue to apply pressure on Russia, in the form of additional sanctions, for its actions in Ukraine.

2. For the week ending March 26, the seasonally adjusted number of Americans filing initial claims for unemployment increased by 14,000 from the previous week’s revised level to reach a new level of 202,000. The previous week’s level was revised higher by 1,000 claims. The 4-week moving average of claims was 208,500, a decrease of 3,500 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 250 claims.

3. Fed Governor Lael Brainard and San Francisco Fed President Mary Daly both made comments this week regarding the Fed’s approach to coming interest rate hikes and the reduction of its balance sheet as it attempts to bring runaway inflation under control. Brainard said “It is of paramount importance to get inflation down” and said that the Fed “will continue tightening monetary policy methodically through a series of interest rate increases and by starting to reduce the balance sheet at a rapid pace as soon as our May meeting.” Daly commented that raising rates “is what is necessary to ensure that again, [you] go to bed at night, you’re not worrying about whether prices will be higher, considerably higher tomorrow.” The comments sent the Dow tumbling and the 30-year fixed mortgage rate over 5%, which could further impact an already slowing housing market. The comments by these two officials in particular are important because both have been considered to be “doves” in the past, meaning that they typically favor lower rates and less restrictive monetary policies.

4. On Monday, the bond market continued signaling that the U.S. economy could be on its way into a recession. U.S. Treasury yields inverted again when the yield on the 2-year Treasury dipped to 2.424% while the 10-year Treasury note rose roughly 4 basis points to hit 2.412%. The yield on 5-year government bonds moved 1 basis point higher to 2.56% while the 30-year Treasury bond jumped 5 basis points to hit 2.473%. Yields move inversely to prices and 1 basis point is equivalent to 0.01%. Nationwide chief investment of research Mark Hackett, in a note to clients, said “The yield curve inversion continues to be the focus of investors, triggering conversations around the timing of the next recession. Historically, the yield curve inversion has meant that the fuse is lit for a recession. But the timing of a recession is impossible to predict at this stage.” Hackett added, “While it is way too early to become defensive, shifting incrementally to a more conservative strategy makes sense. In this environment, quality trumps momentum-based growth.”

5. The U.S. Congress voted this week to revoke Russia’s “most favored nation” trade status this week due to its continued invasion of Ukraine. The move paves the way for steeper tariffs on goods from Russia and is a formal step towards cutting normal economic ties between the U.S. and Russia. The measure will now go to President Joe Biden’s desk for signature into law. The House of Representatives passed the measure in a resounding 420-3 vote, while the Senate voted unanimously on the same measure at 100-0.

6. As expected, the war between Russia and Ukraine has begun to impact grain and fertilizer stocks, and thereby the price and availability of food. Russia and Belarus typically provide nearly 40% of the world’s exports of potash, a vital ingredient in fertilizer. Russia’s exports are now blocked, for the most part, under sanctions while in February a major supplier in Belarus declared force majeure and said it would not be able to uphold its contracts due to forces beyond its control. Russia and Ukraine combined make up 28% of fertilizer exports made from nitrogen, phosphorous, and potassium, according to Morgan Stanley. The war and the ensuing sanctions on Russia have disrupted those shipments and sent fertilizer prices through the roof. CF Industries CEO Tony Will said, in a recent appearance on CNBC, “We are absolutely facing a problem of catastrophic proportion here. Not only is the issue lack of availability and affordability of nutrients and inputs, but Russia and Ukraine have historically exported about 30% of the global wheat trade and 20% of the global corn trade.”

7. Oil prices continued their declines this week after other countries announced plans to make their own releases from their strategic stockpiles. Member nations of the International Energy Agency (IEA) have agreed to release 60 million barrels of oil over the next six months, with the United States matching that amount as part of its 180 million barrel release that it announced in March. Brent crude futures settled the week at $102.78 while U.S. West Texas Intermediate (WTI) futures settled at $98.26.

8. The euro drifted briefly sideways against the U.S. dollar at the very start of the trading week and then almost immediately began trending lower. The euro declined through Monday, took a brief pause during the afternoon, then declined again through Wednesday morning. The euro bounced slightly higher on Wednesday but could not maintain momentum and began drifting lower again towards the end of the day. The euro maintained its downward trend all the way into Friday’s trading and will finish out the week to the downside against the U.S. dollar but managed to pull slightly away from its lows for the week before the market closed.

9. The Japanese yen began the trading week drifting to the downside against the dollar, moving slightly lower throughout Monday’s trading, popping briefly back positive on Tuesday, then resuming its downward trajectory. Like the euro, the yen touched its lows against the U.S. dollar on Friday but bounced slightly higher just prior to the market close. The yen will also close out the week to the downside against the U.S. dollar.

The war between Russia and Ukraine continues to drag on, driving market volatility across multiple sectors ever higher. Inflation also continues to surge, particularly in food and energy. Russia, Belarus, and Ukraine previously accounted for a substantial portion of the world’s grain and fertilizer supplies, in addition to precious metals and other elements vital in the production of semiconductors, which were already in short supply due to disruptions caused by Covid-19 even before Russia invaded Ukraine. Disruptions to fertilizer ingredients and raw grain out of Ukraine will likely send food prices soaring and could substantially decrease the availability of food supplies across much of Europe.

Comments from multiple Fed officials this week led investors to project that the Fed intends to be even more aggressive with its monetary tightening than previously hinted at by the Federal Open Market Committee and Fed Chair Jerome Powell. The Fed has already apparently discussed using 500 basis point hikes in the near term, and even previously “dovish” officials seemed to take the stance this week that the Fed should accelerate the rate at which it intends to decrease the size of its bloated balance sheet. Surging inflation has even begun to take a bite out of those in the higher income bracket in the U.S. Previous polls have shown that most consumers in the U.S., over 60%, consider themselves living paycheck to paycheck now. These consumers have been scaling back on discretionary purchases for quite some time as inflation has skyrocketed, but those with higher incomes have previously seemed to feel immune to such cuts. This mentality has apparently begun to shift. A new survey from CNBC and Momentive notes that concerns over inflation and the risk of a full-blown recession are on the rise. The survey found that even those Americans with incomes of at least $100,000 have begun to say that they have cut back on spending, or intend to do so soon, just as those with lower incomes have begun to do. The higher income consumer demographic has frequently kept the economy afloat during the Covid-19 induced crisis period. Those with higher incomes are responsible for up to ¾ of the spending in the U.S. economy. The disappearance of such a large portion of consumer spending could be just one of the triggers that could send the U.S. economy into recession.

Continued geopolitical uncertainty will likely lead to further increases in market volatility. Russia, after failing to capture Ukraine’s capital Kyiv, appears to be shifting its manpower to the east into the Donbas region. Fighting has gone on in the Donbas region, where Russian-backed separatists have been trying to take over, for years. A rocket attack on a train station in the eastern Ukrainian city of Kramatorsk resulted in at least 50 people killed and more than 80 injured. The station was full of civilians trying to flee the coming conflict. Moscow, as usual, denied being behind the rocket strike despite significant evidence to the contrary. Ukrainian leaders are warning that the fighting in the Donbas could be brutal, resembling some of the battles that took place during World War II. The government of the Cayman Islands announced this week that in cooperation with international sanctions on Russia, it has frozen roughly $7.3 billion worth of assets that it says belong to more than 800 sanctioned Russian oligarchs and entities. Switzerland announced similar asset freezes this week, saying that it had frozen roughly $8 billion in assets of sanctioned individuals and entities since the war broke out on February 24. Russia has begun to make thinly veiled threats to Finland over its desire to join NATO. Finland has a long history of conflict with Russia, having been invaded by them during the Second World War. Sweden is also apparently seeking NATO membership and Kremlin spokesman Dmitry Peskov said on Thursday that if both are granted membership Russia would have to “rebalance the situation” with its own measures. Peskov said Russia would have to make its “western flank more sophisticated in terms of ensuring our security.”

The unstable geopolitical environment and the ensuing economic uncertainty that goes along with it continues to lead investors to seek assurances that they have sufficiently diversified their portfolios so that they minimize any impact of market collapses across multiple sectors. One such diversification tactic that many of these investors have deployed is the acquisition of physical precious metals whenever buying opportunities present them with the opportunity to add more physical products to their portfolios at a relative discount. Physical precious metals have a long history of retaining value during times of unrest. 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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