The Precious Metals Week in Review – August 5th, 2022

1. Market volatility continued this week as the Bank of England raised rates for the first time in decades and the release of the Non-Farm Payrolls report was eagerly awaited in the U.S. Tensions between the U.S. and China escalated further this week following a visit to Taiwan by Nancy Pelosi.

2. For the week ending July 30, the seasonally adjusted number of Americans filing initial claims for unemployment jumped by 6,000 from the previous week’s revised level to reach a new level of 260,000. The previous week’s level was revised lower by 2,000 claims. The 4-week moving average of claims was 254,750, an increase of 6,000 from the previous week’s revised moving average. The previous week’s moving average was revised higher by 500 claims.

3. The Non-Farm Payrolls Report for July was released on Friday and easily topped expectations. The U.S. economy added 528,000 jobs during July, beating the Dow Jones estimate for the addition of 258,000 jobs by a huge margin. The official unemployment rate was 3.5%, just beating Dow Jones expectations for a rate of 3.6%. Wage growth also grew in July, with average hourly earnings climbing by 0.5% for the month, and 5.2% for the year. The news was initially well received by markets, but the rally was short-lived as traders realized the wage growth is still being outpaced by inflation. Traders appear to be pricing in another 75 basis point rate hike by the Fed when it next meets in September.

4. As inflation continues to outpace wage growth, American credit card balances surged by 13%, or $46 billion, in the second quarter of 2022, its fastest pace of growth in 20 years, according to a report by the Federal Reserve Bank of New York. Most Americans say that they need to be making $107,800 per year to feel financially healthy, which is near double the national average wage. More and more consumers are relying on their credit cards to bridge the gap between what their take-home pay is, versus what they are now having to spend for everyday goods and services.

5. The New York Federal Reserve also reported on Tuesday that U.S. household debt surged past the $16 trillion mark for the first time ever in the second quarter. American debt rose 2% during the second quarter, climbing another $312 billion and rising to a total of 16.15 trillion through the end of June. Much of the gains in household debt were driven by mortgages and vehicle purchases, the costs of which have surged as inflation has become deep-rooted and the Fed embarks on a steady stream of interest rate hikes to try to tame it. In a blog post accompanying the release of the report, the New York Fed said, “Americans are borrowing more, but a big part of the increased borrowing is attributable to higher prices.”

6. Rafael Grossi, head of the United Nations’ nuclear agency warned this week that Ukraine’s Zaporizhzhia nuclear plant is “completely out of control.” Russian troops seized control of the plant in early March and have essentially been using it as a shield for military equipment, storing ammunition and explosives inside some of the structures. Grossi told the Associated Press that he was “pleading” with Russia and Ukraine to allow experts to stabilize the facility in order to avoid a nuclear accident. Grossi said “Every principle of nuclear safety has been violated. What is at stake is extremely serious and extremely grave and dangerous.”

7. The United Kingdom’s Ministry of Defence confirmed Thursday that the first ship loaded with Ukrainian Grain from the port of Odesa arrived at the Bosphorus Strait, in northwest Turkey. The Ministry said, following the ship’s safe arrival, “It is almost certain the success of this transit will result in more frequent transits in both directions.” Russia has blockaded Ukraine’s ports since it began its unprovoked invasion in February. The Ministry added that “Clearing the backlog caused by the blockade that has been in place since February 2022 will remain a logistical challenge.”

8. The Bank of England opted to raise interest rates this week, adding 50 basis points and taking borrowing costs to 1.75% as they too join the fight against inflation. This is the fastest such rate increase by the BoE in 27 years. Governor Andrew Bailey told CNBC that inflation risks had surged since the bank’s previous meeting in June, which prompted it to take “stronger action.” The BoE also revised its outlook for the U.K. economy, projecting that the country will enter recession from the fourth quarter of 2022, which it projects to last for at least five quarters. The BoE also noted that it now sees inflation in the U.K. peaking at 13.3% in October, much higher than the previously predicted 11% and primarily driven by rapidly rising energy prices.

9. On Wednesday, the International Monetary Fund warned European governments not to intervene with broad-based financial support in the region’s worsening energy crisis that is primarily a result of Russia’s ongoing reduction of gas flows into Europe via the Nord Stream 1 pipeline. The IMF did encourage support for the most vulnerable in the region but said that consumers should bear the brunt of the cost increases to hopefully encourage them to conserve energy. Many policymakers in Europe have proposed price controls, subsidies, and tax cuts to attempt to offset rising energy costs. The IMF wrote in a blog post “Governments cannot prevent the loss in real national income arising from the terms-of-trade shock. They should allow the full increase in fuel costs to pass to end-users to encourage energy saving and switching out of fossil fuels.”

10. China continued its saber-rattling this week off the coast of Taiwan, firing multiple missiles into the waters surrounding the tiny island nation. The strikes coincided with China’s largest ever military drills in the region, taking to the seas and skies around Taiwan just one day after Nancy Pelosi rejected Beijing’s warnings not to visit the island, appearing for a “solidarity trip” on Wednesday. Japan, which is tracking China’s ongoing drills, said as many as four missiles flew over Taiwan’s capital, and that five of nine missiles that were fired towards Japan’s territory landed in its so-called “Exclusive Economic Zone” (EEZ). Tokyo filed a diplomatic protest over the unprecedented event. Taiwan’s defense ministry confirmed Japan’s report of missiles flying over the capital but said that they were “high in the atmosphere” and constituted no threat. Washington-based Asia security specialist Bonnie Glaser when asked about the missile launches over Taiwan, said “That’s unprecedented. In my view, the larger threat is that China is doing a rehearsal for a blockade, demonstrating it can block Taiwan’s ports and airports, and prevent shipping.” The drills are supposedly scheduled to continue through noon on Sunday.

11. On Friday, China amped up the pressure on the U.S., saying that it was canceling working meetings with the U.S. Department of Defense and the China-U.S. Maritime Military Security Consultation Mechanism due to House Speaker Nancy Pelosi’s recent visit to Taiwan. The ministry also said that it will no longer cooperate with the U.S. on climate change talks, drug control, repatriation of illegal immigrants, criminal investigations and joint combating of transnational crimes. The White House condemned China for shutting down its engagement with the U.S. on “critical issues” and called the move “fundamentally irresponsible”, saying that it would punish not just America, but “the whole world.”

12. Oil prices were back under pressure this week as concerns over supply shortages were offset by expected declines in demand for fuel due to inflation and slowing economic growth around the globe. Brent crude futures settled at $94.92 per barrel on Friday, while West Texas Intermediate crude settled at $89.01 per barrel. These are multi-month lows for both oil contracts.

13. The euro remained bound in its narrow trading range against the U.S. dollar for much of the week. The embattled currency began the week briefly moving to a high just past $1.02, but quickly began a downward slide that saw it near $1.01 by mid-week. On Wednesday the euro began climbing back near its opening levels for the week but had lost momentum by Thursday when it slid sideways overnight. Just prior to the market closing on Friday, the euro reversed course, dropping back near its lows for the week before slightly recovering minimal ground. The euro will close out the week lower against the U.S. dollar

14. The Japanese yen began the week with a near vertical move slightly to the upside against the U.S. dollar. From there, the yen climbed to its highs, which it reached in early trading on Tuesday, before reversing course and trending to the downside for much of the rest of the week. The yen did attempt a brief recovery late Thursday, but the upward moved was short-lived and on Friday, the yen took a vertical move lower, closing out the week at its lows against the U.S. dollar.

Escalating geopolitical tensions and the ongoing surge in global inflation continue to be the primary concerns for investors. Russia’s ongoing invasion of Ukraine continues to put pressure on global food and energy prices. Even though grain has begun to flow out of Ukraine for the first time since Russia’s unprovoked assault began in February, the rate of shipments is nowhere near previous levels and the pace of shipments cannot be guaranteed due to ongoing concerns over Russia’s adherence to the agreement between the two. China escalated global tensions in the region this week, conducting military drills that Taiwan described as a simulated attack on the island. China’s Ministry of Defense said in a statement on Saturday that it had done nothing more than carry out military exercises as planned in sea and airspaces to the north, southwest, and east of Taiwan, focusing on “testing the capabilities” of its land strike and sea assault systems.

On Friday, China imposed sanctions on U.S. House Speaker Nancy Pelosi and her immediate family in response to her visit to Taiwan last week. Beijing had repeatedly requested that Pelosi not visit the island nation that it claims is nothing more than a rogue province of mainland China under its “One China” policy. A ministry spokesperson said in a statement “In disregard of China’s grave concerns and firm opposition, Speaker of the U.S. House of Representatives Nancy Pelosi insisted on visiting China’s Taiwan region. This constitutes a gross interference in China’s internal affairs. It gravely undermines China’s sovereignty and territorial integrity seriously tramples on the one-China principle, and severely threatens peace and stability across the Taiwan Strait.” They added, “In response to Pelosi’s egregious provocation, China decides to adopt sanctions on Pelosi and her immediate family members in accordance with relevant laws of the People’s Republic of China.” The statement did not go into detail about the specifics of the sanctions. China also cut off joint talks with the U.S. on security and defense and climate change.
As global consumer goods and energy prices continue to surge, the world’s central banks continue to be reactionary on inflation, hiking rates at record paces in what has thus far been a vain attempt to rein in skyrocketing inflation around the globe. Russia continues to exacerbate the matter, particularly in the energy sector, by further reducing its gas flows into Europe, which has become heavily dependent on Russian natural gas for its energy needs over the past few decades. Germany, which has long been considered one of the primary economic engines of the Eurozone, is acutely affected by the gas supply reduction. German materials giant Covestro warned on Tuesday that it may have to shut down some of its sites if gas rationing begins. The company said “If gas supplies are rationed in the further course of the year, this could result in partial load operation or a complete shutdown of individual Covestro production facilities, depending on the level of the cutback. Due to the close links between the chemical industry and downstream sectors, a further deterioration of the situation is likely to result in the collapse of entire supply and production chains.” Further supply chain disruptions would likely send inflation surging even higher, despite the best efforts of central banks to control it. Covestro said in its report that the war in Ukraine had “fundamentally changed the geopolitical situation and caused extensive consequences for the global economy. The Group, therefore, expects continued impacts on global supply chains, very high energy price levels, high inflation and weaker growth in the global economy.”

As geopolitical tensions escalate, inflation runs rampant, and world leaders continue to waffle over how to respond to Russia and China’s increasing aggression, investors continue to seek out ways to ensure that their portfolios are sufficiently diversified in an attempt to insulate them from a market collapse in any one sector. To avoid overexposure to equity markets and real estate markets, which have become increasingly volatile as recent world events have unfolded, many investors have sought out other alternative investments in their attempts to diversify. One such alternative investment, that many analysts have once again begun recommending including at least some percentage of a well-diversified portfolio, is physical precious metals. Physical precious metals have a long history of being viewed as a hedge against geopolitical uncertainty, economic turmoil, and inflation. Investors who hold to this view have continued to use temporary price dips in physical precious metals as buying opportunities to acquire more physical products for their investment portfolios. Remember 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. You should also 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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