The Precious Metals Week in Review – June 24th, 2022

1. Market volatility continued to escalate this week as markets digested the news coming out of Federal Reserve chairman Jerome Powell’s testimony in front of Congress after the Fed hiked rates by 75 basis points last week. The ongoing war in Ukraine also continues to impact markets and the global economy as a whole.

2. For the week ending June 18, the seasonally adjusted number of Americans filing initial claims for unemployment dipped by 2,000 from the previous week’s revised level to reach a new level of 229,000. The previous week’s level was revised higher by 2,000 claims, essentially leaving claims unchanged from the previous week’s reported numbers. The 4-week moving average of claims was 223,500, an increase of 4,500 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 500 claims.

3. Federal Reserve Chairman Jerome Powell testified in front of the Senate Banking Committee in Congress this week and painted a picture of continued rate hikes until the central bank sees “compelling evidence” that inflation is beginning to come down. Powell said “At the Fed, we understand the hardship high inflation is causing. We are strongly committed to bringing inflation back down, and we are moving expeditiously to do so. We have both the tools we need and the resolve it will take to restore price stability on behalf of American families and businesses.” Powell said that despite the inflation problem, economic conditions are generally favorable, with a strong labor market and persistently high demand. Commenting on the Fed’s desire to continue implementing rate hikes for the rest of this year, Senator Elizabeth Warren said such a policy could “tip this economy into recession.” Warren went on to say, “You know what’s worse than high inflation and low unemployment is high inflation and a recession with millions of people out of work, and I hope you’ll reconsider that before you drive the economy off a cliff.” Powell commented back that a recession is “certainly a possibility. It’s not our intended outcome at all, but it’s certainly a possibility, and frankly the events of the last few months around the world have made it more difficult for us to achieve what we want, which is 2% inflation and still a strong labor market.” Powell also noted that while the Fed is trying to achieve a “soft landing” to avoid recession, such an outcome “has been made significantly more challenging by the events of the last few months, thinking here of the war and commodities prices and further problems with supply chains. The question of whether we’re able to accomplish [a soft landing] is going to depend to some extent on factors that we don’t control.”

4. Citigroup became the latest bank to raise its expectations for a recession. Chief Global Economist Nathan Sheets said in a note to clients that the odds of a recession occurring are now at 50%, with a perfect storm of higher interest rates and skyrocketing inflation tamping down consumer spending and economic output. Sheets said “The global economy continues to be afflicted by severe supply shocks, which are pushing up inflation and driving down growth. But more recently, two further factors have burst onto the scene: Central banks are hiking policy rates with increasing vigor in their fight against inflation, and the global consumer’s demand for goods looks to be softening.” Sheets continued, saying “We conclude that central banks face a daunting challenge as they seek to wrestle inflation down. The experience of history indicates that disinflation often carries meaningful costs for growth, and we see the aggregate probability of recession as now approaching 50%. Central banks may yet engineer the soft – or ‘softish’ – landings embedded in their forecasts (and in ours), but this will require supply shocks to ebb and demand to remain resilient.”

5. The University of Michigan’s Surveys of Consumers was released on Friday and noted that consumers expect inflation to rise at a 5.3% annualized rate as of the end of June. The survey is closely followed by the Federal Reserve as a proxy for consumers’ willingness to continue contributing to the nation’s GDP – by their willingness to spend. Earlier this month, Fed Chair Jerome Powell noted that rising consumer inflation expectations had helped the central bank decide to conduct a 75 basis-point hike. The survey showed overall consumer sentiment falling to 50, a record low that is 14.4% below May’s level and 41.5% lower than one year ago. Survey directory Joanne Hsu said that consumers had “expressed the highest level of uncertainty over long-run inflation since 1991, continuing a sharp increase that began in 2021. Consumers across income, age, education, geographic region, political affiliation, stockholding, and home ownership status all posted large declines. About 79% of consumers expected bad times in the year ahead for business conditions, the highest since 2009. Inflation continued to be of paramount concern to consumers; 47% of consumers blamed inflation for eroding their living standards, just one point shy of the all-time high last reached during the Great Recession.”

6. Russia’s invasion of Ukraine continues to grind on, slowed by Ukrainian counterattacks. Washington-based think-take the Institute for the Study of War (ISW) said on Thursday in a report that regardless of the outcome of Russia’s attempt to capture the cities of Severodonetsk and Lysychansk, Russia’s ability to maintain its offensive is likely to stall out in the coming weeks. Russia has been making gains in the eastern region of Ukraine, where the aforementioned cities are located. Even if Russia manages to capture both, the think tank posits, it “will not represent a major turning point in the war. Ukrainian forces have fundamentally accomplished their objective in the battle by slowing down and degrading Russian forces. Russian offensive operations will likely stall in the coming weeks… likely granting Ukrainian forces the opportunity to launch prudent counteroffensives.”

7. The push for green energy and transportation has hit a significant snag in the wake of both the pandemic and the ongoing war in Ukraine. Raw material costs for electric vehicles have shot to more than double their pre-pandemic prices. Cost increases have also not been isolated to just those materials for manufacturing EVs. Costs for materials to manufacture traditional internal combustion-powered vehicles have also more than doubled. The surge has seen automakers across the sector raising prices on all of their new vehicles. Last week Ford Motor CFO John Lawler said that the rising costs of commodities have destroyed the profit the company expected to make on its electric Mustang Mach-E. GM announced on Friday that it would be raising the price of its electric Hummer by over $6,000, blaming higher prices for parts, technology, and logistics. Tesla, Rivian, Lucid, and other EV manufacturers have all also announced price hikes.

8. The retail industry may soon be facing a growing wave of possible bankruptcies. 90-year-old cosmetics giant Revlon filed for Chapter 11 bankruptcy protection last week, the first household consumer-facing name to file for bankruptcy in many months. Surging prices and changing consumer habits resulting from months of enforced confinement during the pandemic have curtailed demand for certain goods. Brick-and-mortar stores are dealing with bloated inventories and the very real possibility that a recession could be around the corner that could further dent consumer demand.

9. Oil prices remained relatively unchanged for the week, despite renewed volatility in the energy sector. Brent crude settled at $113.12 per barrel, the same as last week’s Friday close, while U.S. West Texas Intermediate crude fell $1.94 from last week’s close to settle at $107.62 per barrel.

10. The euro also began the trading week edging higher against the U.S. dollar but had settled into a mostly sideways move by the time trading began in earnest on Monday. The euro seesawed in a narrow range through Monday, then made a move to the upside in the morning trading session on Tuesday. Late Tuesday however, the euro began sliding lower and briefly dipped marginally into negative territory late Wednesday morning. The euro touched its lows for the week on Wednesday but shot back to touch its highs for the week later the same day. The euro drifted slowly off its highs in the overnight session, then late on Thursday plunged back near opening levels. Late Thursday afternoon the euro began regaining some ground and continued to seesaw higher through the market close on Friday. The euro finished out the week slightly to the upside against the U.S. dollar.

11. The Japanese yen blipped higher against the U.S. dollar at the start of trading for the week and then traded mostly sideways in a narrow range through Tuesday. Late in the day on Tuesday, the yen began a relatively steep downward move that took it to its lows for the week by the end of the day. Overnight, the yen began regaining the ground it had lost on Tuesday and had finally regained positive territory by mid-day on Thursday. The yen continued trading in a fairly narrow band through the overnight session, but late Friday morning slid back into negative territory and appears set to close out the week just slightly to the downside against the U.S. dollar.

The growing possibility of a looming recession appears to be foremost in the minds of consumers, investors, and analysts alike. Surging inflation continues to take a bite out of the pockets of global consumers and there does not appear to be any relief from skyrocketing prices coming in the near term. Central banks around the world have nearly all begun raising interest rates aggressively to try to curb demand and bring prices back under control. Many analysts fear that the end result of the more hawkish stance by the world’s central banks will be to tip their respective countries, and perhaps the world, over into an outright recession.

Russia’s aggression against Ukraine has triggered massive backlash across the world. Grain shipments out of Ukraine continue to be non-existent and the head of the United Nations warned on Friday that the world could face a food shortage of catastrophic proportions. U.N. Secretary-General António Guterres said that the war in Ukraine has exacerbated the disruptions caused by climate change, the pandemic, and inequality. Guterres said, “There is a real risk that multiple famines will be declared in 2022, and 2023 could be even worse.” He continued, saying “This year’s food access issues could become next year’s global food shortage. No country will be immune to the social and economic repercussions of such a catastrophe.” Guterres noted that U.N. negotiators continue to work to hammer out a deal that would enable Ukraine to export food and let Russia bring both food and fertilizer back to world markets without restrictions. Russia also continues to threaten gas supplies to Europe in retaliation for sanctions that have been imposed upon it for its aggression in Ukraine. European leaders are concerned about the growing possibility of a full shutdown of gas supplies from Russia. Russia’s state-owned Gazprom has cut its gas flows to Europe by roughly 60% over the past few weeks, which Germany Italy, Australia, and the Netherlands all said would force them back to coal for their energy needs. Europe receives nearly 40% of its gas supplies by way of Russian pipelines. Analysts at Berenberg, in a note on Tuesday, said the reduced gas flows from Russia could tip the eurozone into a recession. The note said, “Hit harder than the U.S. by the energy price shock, we project the eurozone economy to enter recession before the U.S.”

Russian Foreign Minister Sergey Lavrov said on Friday that he believes NATO and the European Union are building a coalition that could eventually trigger a war with Russia. On Thursday the EU decided to grant candidacy status to both Ukraine and Moldova, both of whom applied to join the Union almost immediately after Russia invaded Ukraine in February. This is merely the first step in the process of fully joining the EU and was largely seen as a sign of support for Ukraine as it continues to defend itself against Russia’s incursion. Lavrov reportedly compared recent actions by the EU and NATO to Adolf Hitler’s actions during World War II, saying “Hitler rallied a significant part, if not most, of the European Nations under his banner for a war against the Soviet Union. Now, the EU together with NATO, are forming another modern coalition for a standoff and, ultimately, war with the Russian Federation.”

Investors continue to seek diversification of their portfolios as inflation, volatility, and global economic and geopolitical uncertainty surge. With Russia’s ongoing war with Ukraine triggering food shortages across the world and ratcheting up tensions across Europe, North America, and Asia, the global macro-economic outlook is beginning to look dire. China continues to make aggressive moves towards Taiwan in what, emboldened by the U.S.’ fairly weak response to Russian aggression, could be a prelude to it taking the opportunity to see if the U.S. would react similarly weakly to an outright attempt to take control of the tiny island nation. Many investors, watching global uncertainty grow, have returned to the view that physical precious metals may offer a hedge against not only inflation but escalating global aggression. Many such investors continue to take advantage of temporary price dips to add more physical precious metals to their portfolio at a relative discount. Always remember, however, that one of the keys to profitability through the ownership of physical precious metals is to acquire the physical product and hold on to 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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