The Precious Metals Week in Review – May 13th, 2022

1. We apologize for the lack of a memo last week; our usual contributor was out of the office and unable to maintain a reliable enough connection required for its production.

2. Market volatility continued to escalate as lockdowns in China continue to impact supply chains and the war in Ukraine rages on without any sign of a resolution to the conflict. Inflation continues to surge across the globe and multiple central banks have begun implementing interest rate hikes to attempt to rein it in.

3. For the week ending May 7, the seasonally adjusted number of Americans filing initial claims for unemployment increased by 1,000 from the previous week’s revised level to reach a new level of 203,000. The previous week’s level was revised higher by 2,000 claims. The 4-week moving average of claims was 192,750, an increase of 4,250 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 500 claims.

4. On Wednesday, May 4, the U.S. Federal Reserve held its Federal Open Market Committee meeting to determine the near-term course of monetary policy and opted to raise interest rates by 50-basis points, as was widely expected. Still, the latest rate hike in the Fed’s much-telegraphed attempt to rein in surging inflation is the largest interest rate hike in twenty years. In his press conference after the conclusion of the FOMC meeting, Fed chair Jerome Powell, who was recently re-confirmed for another term as the head of the Federal Reserve, underlined the Fed’s commitment to bringing inflation down, but said that a 75-basis point hike, which many analysts have been conjecturing could happen in the very near future, “is not something the committee is actively considering” at this time. Chair Powell said “Inflation is much too high, and we understand the hardship it is causing. We’re moving expeditiously to bring it back down. We’re strongly committed to restoring price stability.”

5. Federal Reserve Chairman Jerome Powell said in an interview with Marketplace on Thursday, May 12, “So a soft landing is, is really just getting back to 2% inflation while keeping the labor market strong. And it’s quite challenging to accomplish that right now, for a couple of reasons. So, it will be challenging, it won’t be easy. No one here thinks that it will be easy. Nonetheless, we think there are pathways… for us to get there.” Powell continued, acknowledging the risks involved, saying “Our goal, our course, is to get inflation back down to 2% without having the economy go into recession, or, to put it this way, with the labor market remaining fairly strong. That’s what we’re trying to achieve. I think the one thing we really cannot do is to fail to restore price stability, though. Nothing in the economy works, the economy doesn’t work for anybody without price stability.”

6. Cryptocurrencies had a disastrous week this week as the stablecoin known as TerraUSD (UST) plunged to 30 cents on Thursday. TerraUSD (UST) was theoretically pegged on a one-to-one basis with the U.S. dollar but lost that peg on Thursday. The move followed on the heels of a smaller plunge in Tether billed as the world’s largest stablecoin, which was also ostensibly pegged to the U.S. dollar. Tether dropped to 95 cents on Thursday as more than $3 billion worth of tokens were withdrawn from the system in just one day, but managed to regain the $1 mark on Friday. On Friday, Luna – the sister token to UST, the dollar value of which is used in the algorithms for calculating the value of UST itself, plunged to $0, sending UST to roughly 12 cents. The volatility in these two stablecoins triggered widespread panic across the entire crypto market and sent regulators scurrying to their papers and computer terminals to do more research. Vijay Ayyar, vice president of corporate development and international at the crypto exchange known as Luno said “The Luna/UST situation has hit market confidence quite badly. Overall, most cryptocurrencies are down 50%. Combining this with global inflation and growth fears, does not bode well in general for crypto.”

7. Household debt in the U.S. is surging, nearing $16 trillion even as U.S. consumers face rising interest rates and skyrocketing inflation. According to the latest data from the Federal Reserve, consumer debt and credit rose another 1.7% in the first quarter to hit $15.84 trillion. Much of the increase was due to a rise in mortgage debt, which is up 10% from the first quarter of 2021. Many consumers have been turning to purchase on credit as prices have continued to climb and in a rising rate environment, that is not a good thing. Ted Rossman, a senior industry analyst at CreditCards.com, said “There’s a good chance that Americans’ total credit card balances will soon reach a new record high, marking a sharp reversal from the precipitous drop that occurred in 2020 and early 2021.” Many U.S. consumers used stimulus checks that they received during the pandemic to pay down credit cards on fears that economic shutdowns may curtail, or completely cut off, their sources of income.

8. U.K. Prime Minister Boris Johnson met with Norwegian Prime Minister Jonas Gahr Stoere in London this week. The two signed an agreement to enhance bilateral cooperation between the two countries. According to a statement from Johnson’s office after the news broke, the agreement “underscored their full support for any sovereign choice made by Nordic partners to enhance their security. The Prime Minister and Prime Minister Stoere agreed that neither NATO nor the Nordic region posed a threat and that the longstanding policy of ‘High North, low tension’ had created decades of stability and prosperity for the area.” The meeting came on the heels of Prime Minister Johnson having signed agreements with both Sweden and Finland pledging to come to each other’s aid militarily if it is requested. Both Sweden and Finland are considering joining NATO, despite saber-rattling from Russia over “consequences” for doing so.

9. Turkey, which has largely tried to remain neutral in the ongoing conflict between Russia and Ukraine, has opted not to attempt to stay neutral in Sweden and Finland’s desire to join NATO. On Friday, Turkey’s President Recep Tayyip Erdogan said that he did not support plans for the two nations in question to eventually become members of NATO, bizarrely claiming that the two countries are home to “terrorist organizations.” Erdogan said “We are following the developments regarding Sweden and Finland, but we don’t hold positive views. As Turkey, we don’t want to repeat similar mistakes. Furthermore, Scandinavian countries are guesthouses for terrorist organizations.” Any decision on adding members to NATO requires unanimous agreement from all current members. If Turkey fails to approve the entry of either country, it will bring an immediate halt to their plans to join.

10. As food prices around the world skyrocket, along with everything else, U.S. President Joe Biden has outlined a plan he hopes will boost U.S. crop production to attempt to offset the staggering losses to global agriculture supplies which are directly attributable to the ongoing war in Ukraine. Biden said “Right now, America is fighting on two fronts. At home, it’s inflation and rising prices. Abroad, it’s helping Ukrainians defend their democracy and feeding those who are left hungry around the world because Russian atrocities exist.” Biden outlined a plan that would allow farmers to get insurance for “double cropping” which would allow them to plant a second crop on the same land during the same year. Biden said “Double cropping comes with real risks. If the weather conditions aren’t ideal, or at least good… then the timing of everything is thrown off. But it’s a risk we need to take. That’s why my administration is looking at how to extend crop insurance coverage to give financial security to farmers.”

11. Oil prices were headed for a weekly loss this week, despite a near 4% gain on Friday alone as U.S. gas prices surged to record highs and China appeared ready to ease its Covid lockdowns. Oil prices remain volatile on fears that Europe could ultimately place an embargo on Russian oil, which would take nearly 3 million barrels per day offline. Brent futures settled at $111.55 per barrel while U.S. West Texas Intermediate crude futures settled at $110.49 per barrel.

12. The euro opened the week climbing slightly against the U.S. dollar but quickly reversed that course as trading got underway. The euro dipped through mid-day on Monday, then reversed again and clawed its way back into positive territory. The euro bounced along mostly sideways in a narrow trading range through most of the week but began a decline on Wednesday that then accelerated as Thursday trading got underway. The euro touched its lows for the week late on Thursday and began a slight move to the upside that lasted overnight into Friday. The euro retraced its Thursday gains, heading back to the lows for the week again before bouncing slightly higher just prior to the market close on Friday. The euro closed out the week to the downside against the U.S. dollar.

13. The Japanese yen began the trading week dipping slightly lower against the U.S. dollar. By Monday morning, the yen had recovered positive ground and drifted slowly higher through much of the week. Overnight on Wednesday the yen began a sharper climb to the upside and touched its highs for the week around mid-day on Thursday. The yen only briefly touched its highs and then began a shallow decline that lasted all the way into Friday. The yen did not lose enough ground to take it back into negative territory however and will finish out the week to the upside against the U.S. dollar.

Market volatility remains extreme, primarily driven by the ongoing conflict in Ukraine, continued supply chain issues, and rampant inflation across the globe. Ukraine continues to defy all odds in defending its territory against its much larger neighbor. Russia, in its attempt to seize most of eastern Ukraine, has seen its under-armed and under-defended target hand multiple disastrous defeats to Russia’s supposedly superior forces. Russian troops continue to wreak widespread devastation throughout Ukraine however, utilizing missile attacks and airstrikes to try to wear down the Ukrainian’s resolve to keep fighting. Russia invaded Ukraine under what was always believed to be false pretenses and the aftermath of their decision to do so will be felt around the world for decades. Russia and Ukraine supply nearly 25% of the world’s wheat exports and nearly 20% of global barley exports. The raging conflict has halted those exports in both countries as Ukrainian ports and facilities have been destroyed and Russian exports fall under sanctions for Russia’s actions. In April, the United Nations issued a report saying that the crisis in Ukraine is creating a “perfect storm” of disruptions to global food, energy, and financial markets and that the ongoing war “threatens to negatively affect the lives of billions of people around the world.” The UN report went on to note that as many as 1.7 billion people are “highly exposed” to the effects of the conflict, with 553 million of those already classified as poor, and another 215 million that was already undernourished before the true effects of the crisis could begin to be felt. UN Secretary-General Antonio Guterres said at a briefing on the report that “Inflation is rising, purchasing power is eroding, gross prospects are shrinking and development is being stalled and in some cases gains are receding. Many developing economies are drowning in debt with bond deals already on the rise since last September, leading now to increased premiums and exchange-rate pressures. And this is setting in motion a potential vicious circle of inflation and stagnation, the so-called stagflation.”

One of Russia’s apparent goals in its invasion of Ukraine was to force that country to abandon its plans to join NATO. Russia has long been against the expansion of NATO, particularly when it comes to its neighboring countries. NATO has long been viewed in a hostile light by Moscow. The long-term nature of the ongoing invasion, however, and hints that Russia may have hostile intentions towards Moldova as well, has triggered the exact opposite response it had hoped for. Finland and Sweden have both made clear their intentions to join the alliance in the face of Russia’s expansionary goals. NATO views an attack on any one of its members as an attack on all its members and would immediately mobilize massive forces in such an event. Russia, which is not a member of NATO, has always viewed this as a tacit threat to its national security. Russia has vowed to take “retaliatory steps, both of a military-technical and other nature, in order to stop threats to its national security arising” if Finland does attempt to join NATO. Finland’s Foreign Ministry responded to these threats by saying that Finland “is a sovereign state and makes independent decisions on its security and defense. Finland is aware of the various challenges involved in the NATO membership process and is prepared for diverse hybrid and cyber threats and military means of pressure.”

Geopolitics and skyrocketing inflation continue to remain of primary concern for investors. Despite outlining plans that it hopes will help alleviate the growing potential food crisis that is resulting from the ongoing conflict in Ukraine, the White House clearly cannot snap its fingers and instantly make food crops appear on demand. Food prices should be expected to continue to climb, and skyrocketing prices along with global shortages could lead to unrest, particularly in developing economies in poorer parts of the world. Raising interest rates, which is the go-to tool for central banks to fight inflation will only add to the pressure as consumers, already faced with paychecks that don’t go as far as they used to at the grocery store, begin buying on credit to be able to sustain themselves. Market volatility should be expected to continue in all sectors, particularly if Russia becomes more belligerent in its threats to other nearby countries. In the face of such glaring uncertainty, wise investors continue to take steps to make sure that their portfolios are diversified against economic and geopolitical shock events. Many investors continue to make physical precious metals a part of those diversification plans, utilizing temporary price dips as buying opportunities to add more physical products to their portfolios at a relative discount. Precious metals have a long and storied history of being viewed as an intrinsic store of value during times of economic and geopolitical turmoil. Always remember, however, 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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