The Precious Metals Week in Review – August 19th, 2022

1. The summer rally appeared to show signs of slowing this week, with the Dow Jones Industrial Average sliding 200 points on Friday and the S&P 500 on pace to log its first losing week in the last 4 weeks. The plunge appeared to have been triggered by the release of the latest meeting minutes from the Federal Reserve’s latest Federal Open Market Committee meeting in July. A plunge in cryptos also took place this week, sending Bitcoin to a more than three-week low on the sudden sell-off.

2. For the week ending August 13, 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 250,000. The previous week’s level was revised lower by 10,000 claims. The 4-week moving average of claims was 246,750, a decrease of 2,750 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 2,500 claims.

3. The U.S. Federal Reserve released its latest Federal Open Market Committee (FOMC) meeting minutes this week, and they showed a Fed that was perhaps not as willing to back off its pace of interest rate hikes as markets had apparently begun to suspect. The meeting minutes from July, at which the Fed conducted another 0.75 percentage point rate hike, noted that there were only a few signs that inflation might be abating and repeatedly stressed that there was “a significant risk facing the Committee” that “inflation could become entrenched if the public began to question the Committee’s resolve to adjust the stance of policy sufficiently.” St. Louis Federal Reserve President James Bullard also made comments that indicated that the Fed would likely continue hiking rates in the near term despite a recent raft of inflation data that seemed to show that inflation in the U.S. may be nearing its peak.

4. Comments from the Federal Reserve will be closely watched in the coming weeks as most members will be attending an annual economic symposium in Jackson Hole, Wyoming, titled “Reassessing Constraints on the Economy and Policy” from August 25 through August 27. Chairman Jerome Powell is scheduled to speak on August 26, and his comments, along with those made by other Fed officials during the symposium, will be carefully scrutinized for indications on upcoming policy moves by the Fed.

5. The Department of Justice, which fell under heavy criticism for its decision to very publicly raid former President Donald Trump’s residence last week, urged a judge to keep the search warrant affidavit under seal, saying that it contained “highly sensitive information” that could compromise an “ongoing law enforcement investigation that implicates national security.” The judge in question, Judge Bruce Reinhart, apparently disagreed with the DOJ’s assessment. Reinhart said, “As I ruled from the bench at the conclusion of the hearing, I find that on the present record, the Government has not met its burden of showing that the entire affidavit should remain sealed.” Reinhart gave the government one week to file any proposed redactions to the affidavit. Trump spokesman Taylor Budowich praised Judge Reinhart on Twitter for rejecting “The DOJ’s cynical attempt to hide the whole affidavit from Americans” and insisted that “no redactions should be necessary.” He went on to say former President Trump “has made his view clear that the American people should be permitted to see the unredacted affidavit related to the raid and break-in of his home.” During the raid, FBI agents broke into the former President’s home and seized multiple boxes of documents and other items, apparently including Mr. Trump’s passports.

6. Sales of previously owned homes in the U.S. fell in July, sliding almost 6% lower and sending the housing market into a technical recession as both interest rates and prices remain elevated. From the same time period one year ago, sales are down roughly 20%. Lawrence Yun, the chief economist for the Realtors, said, “In terms of economic impact, we are surely in a housing recession because builders are not building. However, are homeowners in a recession? Absolutely not. Homeowners are still very comfortable financially.”

7. As Russia’s invasion of Ukraine was poised to enter its six-month, Ukrainian President Volodymyr Zelenskyy warned via Twitter on Thursday that “The world is on the verge of nuclear disaster due to occupation of world’s third largest nuclear power plant in Energodar, Zaporizhzhia region. How long will it take the global community to respond to Russia’s irresponsible actions and nuclear blackmailing?” The Kremlin hinted that it may allow the IAEA access to the Zaporizhzhia nuclear plant in “the first days of September.” Mikhail Ulyanov of Russia’s foreign ministry indicated in a TASS report that was translated by NBC news that “It’s too early to say anything about the details; these are all extremely sensitive issues. Forecasts do not always come true, but, according to my feelings, we can quite realistically talk about the first days of September, unless some extraneous factors that are not related to the goals arise again and objectives of the IAEA visit.” Russia continues to use the power plant as a sort of base from which to shell surrounding towns, apparently in the hopes that Ukraine cannot fire back without damaging portions of the plant.

8. Norway’s central bank jumped on the rate increase bandwagon this week, raising its benchmark rate by 50 basis points and laying the groundwork for another hike in September as inflation hit an annual rate of 4.5% in July. The Norges Bank’s monetary policy committee noted that there is a risk that high inflation could become “entrenched” and that “A markedly higher policy rate is needed to ease the pressures in the Norwegian economy and to bring inflation down towards the target.” A report released after the decision noted that there is “little spare capacity in the Norwegian economy, and persistent global price pressures will lead to a further acceleration in price inflation.”

9. Turkey shocked global markets on Thursday by cutting its primary policy rate – despite inflation near levels of 80% in the country. The lira slid to near record lows against the U.S. dollar on the surprise move. As most central banks around the world are raising rates to battle inflation, the Turkish central bank opted to take interest rates 1% lower than their current 14% level. Timothy Ash, a senior emerging markets strategist at BlueBay Asset Management said, “Turkey – Insane with inflation at 80% and still rising the CBRT cuts rates, against expectations, by 100bps to just 13%. Ridiculous move. Obviously, they have got cash in their pockets from Russia and the Gulf and think they can cut rates [plus] hold the lira.” London-based Capital Economics said in a note on Thursday, “This latest move could be the trigger for yet another currency crisis. It is clear that the CBRT is taking its instructions from President Erdogan, whose unorthodox views form the basis of the government’s ‘new economic model’ of low real interest rates. Turkey’s external position remains extremely poor.”

10. Germany has apparently managed to fill its natural gas storage facilities to a level of more than 75% this month, two weeks ahead of schedule and despite Russia’s continued restriction of gas flows through the Nord Stream 1 pipeline. According to the latest data compiled by industry group Gas Infrastructure Europe, Germany has filled its gas storage facilities to over 77%. The following target levels, mandated by Germany’s government, are 85% by October 1 and 95% by November 1. Germany, long considered the main “economic engine” for the European economy, has been increasingly concerned that Russia’s restriction of natural gas flows into Europe could force it to begin rationing gas, which would impact the ability of its industry to keep functioning at current levels as they enter the winter months and Germany’s citizens require increased natural gas for heating needs.

Flows of gas through the Nord Stream 1 pipeline remain at just 20% of the agreed-upon volume, which Moscow continues to blame on “faulty equipment.” German Economy Minister Robert Habeck said at a press conference on Monday that “Germany developed a business model that was largely based on dependence on cheap Russian gas and thus also a dependence on a president who disregards international law [and] to whom liberal democracy and its values are declared enemies. This model has failed, and it is not coming back.” His comments came on the heels of Trading Hub Europe, Germany’s gas market operator, announcing that households across the nation would face a tax of up to 500 euros ($507.3 US) per year for natural gas. Habeck noted the new tax while making his remarks, saying, “All measures, and this is undisputed, have a price. All measures have consequences, and some of them are also impositions, but they lead to us being less susceptible to blackmail and us being able to decide on our energy supply independently of Russia.”

11. In London, drought conditions have prompted water restrictions that will impact millions of people. Thames Water said, “The driest July since 1885, the hottest temperatures on record, and the river Thames reaching its lowest level since 2005 has led to a drop in reservoir levels in the Thames Valley and London.” The company announced a “temporary use” ban that will begin next week, saying, “Domestic customers should not use hosepipes for cleaning cars, watering gardens or allotments, filling paddling pools and swimming pools, and cleaning windows.” The Temporary Use Ban does not yet apply to businesses, but Thames Water asked those businesses within its area of operation to “be mindful of the drought and to use water wisely.” A spokesperson for the company said, “If we become aware of customers ignoring the restrictions, we’ll contact them to make sure they’re aware of the rules and how to use water responsibly and wisely. There are criminal offenses for those that repeatedly ignore requests to comply with the ban.”

12. As if the heat and water shortages were not causing enough problems across the U.K., real wages have declined at record rates among surging inflation. Average pay in the U.K. has increased by 4.7% in the April to June period, but when factoring in the spike in the cost of living, the net result is a drop of 3% in real wages for the last quarter alone, according to data by the Office of National Statistics. Darren Morgan, director of economic statistics, said, “The real value of pay continues to fall. Excluding bonuses, it is still dropping faster than at any time since comparable records began in 2001.” Increasing energy and food costs have been the primary factors for the drop in real wages, but housing and shelter costs are not far behind.

13. Concerns over a global economic slowdown had oil prices on track for weekly losses, despite some price stabilization that seemed to come into effect on Friday after U.S. crude inventory data reflected a sharp decline. Both Brent Crude and U.S. West Texas Intermediate (WTI) contracts were headed for losses of roughly 1.5% for the week despite exports increasing to a record level of 5 million barrels per day in the most recent week. European demand for American oil has surged as nations in the region seek to replace Russian crude due to that country’s ongoing invasion of Ukraine. Brent crude futures settled at $96.72 per barrel, while WTI crude settled at $90.77 per barrel.

14. The euro drifted sideways against the U.S. dollar at the open for the week but began a downward move that lasted through Tuesday around midday. The euro moved higher on Tuesday, but the move was short-lived and could not maintain the upward momentum. The euro mainly drifted sideways throughout much of the rest of the week but resumed its downward moves late on Thursday. The euro’s slide paused late Thursday night, sliding sideways into Friday trading, but by mid-Friday, the euro had resumed its downward trek. The euro closed out the week to the downside against the U.S. dollar and now appears even closer to reaching parity against the greenback.

15. The Japanese yen blipped higher against the U.S. dollar at the start of the week, but by mid-day on Monday had begun a downward trend that took it lower through the rest of the week. The yen seemed to drift lower in a series of shallow stair-step moves, pausing briefly on Thursday before accelerating to the downside late Thursday and overnight Friday. The yen finished out the week near its lows against the U.S. dollar.

Inflation remains of primary concern to investors as geopolitical turmoil, macroeconomic conditions, and worsening weather scenarios continue to encompass the globe. Even as the war between Russia and Ukraine enters its sixth month, taking food and other agricultural prices into the stratosphere as Ukrainian, Russian, and many Belarusian products, particularly grain and crop fertilizers, disappeared from the market, drought conditions have taken hold across much of Europe, China, and continue in many parts of the U.S. as well. Even as Russia and Ukraine have come to a supposed agreement on safely transporting and distributing much of the grain trapped within those countries, the worsening drought conditions throughout the rest of the world can only add to the stress on food and agricultural supply chains. In London, water restrictions are going into place for consumers as the source of the Thames River reportedly “runs dry”, shifting five miles further downstream, and water levels drop in reservoirs across the nation amid extreme heat. China issued its first drought emergency this year as areas of the Yangtze River began drying out, putting pressure on the nation’s power grid amid record-breaking heat. The heatwave in China, where some temperatures soared to 113 degrees Fahrenheit or 45 degrees Celsius, has triggered shutdowns across some industries in an attempt to preserve power supplies for homes, negatively affected crop growth, and threatened livestock. In the Sichuan province, all factories were ordered to shut down for six days to ease power shortages in the region amid a surge in air conditioning usage.

China’s continued “zero covid” approach towards covid infections within its borders also continues to exacerbate supply chain issues as the strict lockdowns involve affect not only shipping ports but transport hubs within China as well. The heatwave China is undergoing could also negatively affect global supply chains. Dan Wang, the chief economist of Hang Seng Bank China, told CNBC’s Squawk Box Asia program on Thursday that the heat had already triggered slowdowns in the country’s steel, chemical and fertilizer industries. Wang said the heat “will affect those big energy-intensive industries, and it will have a knock-on effect throughout the economy and even to the global supply chain.”

Further supply chain shocks due to geopolitical, macroeconomic, and adverse weather events are becoming more and more likely given recent global events. Heatwaves across Europe, China, and much of the U.S. threaten supply chains that have never fully recovered from the economic shutdowns that were forced upon the world by the spread of Covid-19 in the early days of 2020. Those same supply chains were placed under further stress by the start of the war in Ukraine and then again by China’s renewed shutdowns of some of its busiest ports amid its new “zero-covid” policy. The heatwave underway has further put a crimp on China’s economy, triggering factory shutdowns in a bid to save energy supplies for residents that are now in dire need of cooling their homes. Recent rallies in stock markets seemed to reverse course this week, with Bank of America even warning that the rallies may have been nothing more than a temporary “Bear Market Bounce.” Investors, watching global events and seeing such increased market volatility, continue to try to seek out ways to ensure that their portfolios are genuinely diversified. Many investors have continued to seek out alternative investments that they feel are not so overvalued and which they can add to their portfolios in a bid to diversify them further. Some of these investors have continued adding physical precious metals into their portfolios in these diversification efforts, noting that in relation to other assets, such as equities and real estate, precious metals still seem to be available at a relative discount. These investors continue to take advantage of temporary price dips to add additional physical precious metals into their investment portfolios in hopes that it will aid in their diversification efforts. 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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