The Precious Metals Week in Review – July 22nd, 2022

1. Market volatility continued this week as Russia’s onslaught against Ukraine raged on and central banks around the world shocked markets with unexpected rate moves. In the U.S., the West Coast port of Oakland has been virtually shut down as truckers protest California’s gig labor law, which classifies workers as employees and not independent contractors. Truckers were previously protected from the law by a two-year legal stay, but the when the Supreme Court opted not to hear the case, that protection expired.

2. For the week ending July 16, the seasonally adjusted number of Americans filing initial claims for unemployment surged by 7,000 from the previous week’s unrevised level to reach a new level of 251,000. The 4-week moving average of claims was 240,500, an increase of 4,500 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 250 claims.

3. The U.S. Federal Reserve will hold its next Federal Open Market Committee meeting next week to determine the near-term course of monetary policy in its ongoing fight to tame runaway inflation. The Fed is widely expected to conduct at least one more 75 basis-point hike at the conclusion of its next meeting, but some analysts feel that with inflation running at levels not seen for decades, the Fed might be more aggressive and actually opt to conduct a full percentage point rate hike. Surging interest rates are affecting consumer spending and saving habits as U.S. consumers have been forced to pay more for everyday goods. As interest rates climb, short-term financing options like credit cards and other variable rate loans become more expensive for consumers. Those consumers carrying balances on their credit cards can expect average annual percentage rates to be close to 19% by the end of the year, which would be an all-time record according to Ted Rossman, a senior industry analyst at CreditCards.com.

4. U.S. home sales plunged again in May, with sales of previously owned homes falling 5.4% according to a monthly report by the National Association of Realtors. This is the slowest pace of sales in over a year. Mortgage demand has now fallen to 22-year lows as housing prices continue to skyrocket along with interest rates. The median price of an existing home sold in June set a record at $416,000, an increase of 13.4% year over year. Lawrence Yun, chief economist for the Realtors, said “It is clearly due to the plunging affordability. We have never seen mortgage rates shoot up this fast at this magnitude. Even people who want to buy, they are priced out.”

5. The European Central Bank surprised markets this week with its first rate hike in 11 years, and one that was much larger than expected. The ECB had previously signaled that it would likely begin raising rates in July to try to tame runaway inflation and analysts had projected that the first hike would be 25 basis-points. The ECB instead opted for a 50 basis-point hike, saying in a statement following the decision that “The Governing Council judged that it is appropriate to take a larger first step on its policy rate normalization path than signalled at its previous meeting.” The ECB has held rates in negative territory since 2014 amid a sovereign debt crisis, and economic fallout from the global pandemic. Thursday’s 50 basis-point move puts its deposit rates back at 0. Seema Shah, chief strategist at Principal Global Investors, criticized the ECB’s rate hike in an email, saying that the move was “certainly not accompanied by celebratory smiles.” Ms. Shah went on to say “The ECB is hiking into a drastically slowing economy, facing a sever stagflationary [when inflation is high but economic growth is low] shock that is quite beyond its control, while also facing an Italian political crisis which presents a difficult sovereign risk dilemma.” She added “there is no other developed market Central Bank in a worse position than the ECB.”

6. On Thursday, Italian Prime Minister Mario Draghi again announced that he would be resigning as Prime Minister of Italy. Last week, Italian President Sergio Mattarella rejected Draghi’s resignation and asked him to return to parliament to try to revive his fragile coalition government. That attempt failed when Draghi was again snubbed by his coalition partners in a confidence vote in the Senate on Wednesday. The move effectively means Italy’s government has collapsed, and now paves the way for snap elections in either September or October. Draghi’s leadership over the last 15 months had brought a measure of stability to a country with one of the largest debt loads in Europe. His departure was described as “the greatest loss for Italy” and “the greatest loss for Europe at this point in time” by Silvia Ardagna, chief economist at Barclays.

7. As Russia continues to effectively weaponize its control of gas resources into Europe, European countries are being asked to cut their consumption of natural gas by at least 15% until next spring. The European Commission, which is the executive arm of the European Union, presented the strategy as part of its plan to prepare for reduced gas supplies as the winter period approaches. At a news conference on Wednesday, EC President Ursula von der Leyen said “Russia is blackmailing us. Russia is using energy as a weapon. And therefore in any event, whether a partial major cutoff of Russian gas or a total cutoff of Russian gas, Europe needs to be ready.” On Monday, Russian state-owned energy giant Gazprom said that due to “unforeseeable circumstances” it would not be able to meet the supply obligations of its gas contracts in Europe. Germany’s energy firm, Uniper, said “It is true that we have received a letter from Gazprom Export in which the company claims force majeure retroactively for past and current shortfalls in gas deliveries. We consider this as unjustified and have formally rejected the force majeure claim.”

8. In the United Kingdom, the race to replace Boris Johnson as Prime Minister was whittled down to just to remaining players this week. Liz Truss will apparently face Rishi Sunak in the final vote, which now falls to Conservative Party members in an upcoming postal vote. Results are expected to be announced no later than September 5, with the winner becoming the next Prime Minister. Boris Johnson is expected to remain in place as acting Prime Minister until results are announced.

9. Russia continued its unprovoked onslaught of Ukraine this week, sparking significant concern among world leaders as news broke that the Russian military had move heavy military equipment, including ammunition and explosives, into the largest nuclear plant in Europe, if not in the world. The Zaporizhzhia power plant in southeastern Ukraine is now occupied by Russian troops and it appears that they hope storing their equipment and ammunition inside the facility will prevent Ukraine from making any attempt to disable or destroy it. On Thursday, Russia claimed that Ukraine had fired on the plant with “kamikaze” drones but that no damage had been caused to any of the structures.

10. Even as the war between Ukraine and Russia rages on, officials from both countries agreed to a United Nations-brokered deal to allow grain to resume flowing out of their respective countries via the Black Sea. The officials sat at separate tables in the city of Istanbul, Turkey, and the deal was apparently brokered primarily by the government in Ankara. The deal, if upheld by both sides, is significant as Ukraine is one of the largest exporters of wheat in the world. When wheat shipments were cut off due to Russia’s assault, food prices around the world immediately began rising as supplies became scarcer. Immediate details of the deal were not released, but it is expected to allow Ukrainian vessels to guide ships through waters now dangerously filled with mines, with a local truce in place that would theoretically keep Russia from attacking them. Moscow is also expected to be allowed to restart its own shipments of grain via the Black Sea, but it is unclear whether sanctions that are currently in place on Russia will affect those shipments.

11. Oil prices were under pressure this week on an outlook for further weakening of demand, and the restoration of some of Libya’s output capacity. Brent crude futures settled 0.64% lower on Friday at $103.20 per barrel, while U.S. West Texas Intermediate (WTI) futures dipped 1.71% to settle at $94.70 per barrel.

12. The euro opened the trading week mostly flat against the U.S. dollar, but quickly began climbing throughout overnight trading on Sunday. The euro briefly paused and slightly retraced through overnight trading Tuesday. The euro shot near vertically higher Tuesday morning but paused and began a sideways move that lasted through mid-day on Thursday. The euro went through a shallow decline late on Thursday and then saw volatile trading on Friday that took it to its highs for the week. The euro dipped lower again before market close, but the fall was short-lived and the euro will close out the week to the upside against the U.S. dollar.

13. The Japanese yen traded relatively flat against the U.S. dollar nearly all week, drifting sideways in a very narrow trading band until late Thursday. The yen dipped slightly lower around mid-day on Thursday but then began a move higher that took it to its highs for the week just before the market closed on Friday. The yen will close out the week to the upside against the U.S. dollar.

Geopolitical turmoil continues to be of primary concern to investors as Russia continues its onslaught against Ukraine, the U.S. puts pressure on Nicaragua and China continues its posturing towards Taiwan. Despite an agreement now apparently in place between Ukraine and Russia which would allow both countries to resume grain shipments through the Black Sea, many watching from the sidelines believe that both sides will have trouble abiding by the agreement. If either side fails to honor the agreement, then the hoped-for boost to global grain supplies could disappear before it even materializes. It is also unclear how much grain Ukraine still has available in its stores, or if it even has the capacity to ship any grain that may still be useable after so many of its Eastern ports and much of its infrastructure in the surrounding areas were devastated by Russian artillery and missile attacks. Also adding uncertainty to the outcome of the agreement are Russia’s recent moves to install Russian proxy leaders in the areas it has seized in Ukraine – a move which U.S. intelligence officials say likely means that Moscow is on the verge of trying to annex most of the eastern region of Ukraine in the same manner that it annexed Crimea from Ukraine back in 2014.

In a fairly underreported story this week, the U.S. decided to drop Nicaragua from its list of countries that are allowed to export sugar to the United States at lower import tax rates. The Biden administration, as if it did not already have enough issues to deal with, has apparently decided that it will attempt to “turn up the heat” on Nicaraguan President Daniel Ortega, who held daily show trials against antigovernment activists before the fall elections which were largely viewed as intimidation tactics, but helped him win a fourth straight term. The U.S. views Ortega’s administration as corrupt, and sees the country’s close ties to Russia as a security threat within the region.

The European Central Bank shocked markets this week with a rate hike that was twice what was expected – its first such hike in 11 years. The ECB opted for a 50 basis-point rate hike, which finally takes its deposit rate out of negative territory and back to 0. Most analysts had expected the ECB to ease its way into the rate hike game that most of the rest of the world’s central banks have already begun by carrying out a 25 basis-point hike. Russia also surprised markets this week when it cut rates by 150 basis-points in an effort to deal with its strong currency, cooling inflation and a potential recession. The bigger-than-expected move takes Russia’s key interest rate to 8% from 9%. Analysts had expected Russia to cut rates again, but by only 50 basis points.

As geopolitical and economic turmoil continue to escalate, many analysts have begun advising adding alternative investments into an investment portfolio to create a well-diversified approach that could help hedge against a correction in any one sector, particularly as equity markets continue to be volatile. Many such analysts recommend holding at least some percentage of precious metals as part of a diversification plan. Investors who share this view have continued to use recent price dips as buying opportunities to add more physical precious metals to their investment portfolios 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. Also remember that you should never overextend your ability to maintain ownership of your precious metals over the long term.

Trading Department – Precious Metals International, Ltd.

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