The Precious Metals Week in Review – August 26th, 2022

1. The annual economic symposium in Jackson Hole, Wyoming, kicked off this week, and comments made by Federal Reserve officials were closely monitored by markets, as expected. Comments made by Fed Chair Jerome Powell on Friday sent markets tumbling on Friday.

2. For the week ending August 20, 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 243,000. The previous week’s claims level was revised lower by 5,000. The 4-week moving average of claims was 247,000, an increase of 1,550 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 1,250 claims.

3. During the annual economic symposium in Jackson Hole, Wyoming, this week, which was titled “Reassessing Constraints on the Economy and Policy” this year, comments from Fed officials sent markets sliding lower. The most notable move lower came on Friday, following Federal Reserve Chair Jerome Powell’s comments on the Fed’s ongoing efforts to bring inflation under control. Chair Powell said, “While higher interest rates, slower growth, and softer labor market conditions will bring down inflation, they will also bring some pain to households and businesses. These are the unfortunate costs of reducing inflation. But a failure to restore price stability would mean far greater pain.” Powell’s prepared remarks were unusually terse, lasting just 8 minutes, and his introduction comments noted that the “remarks will be shorter, my focus narrower, and my message more direct.” Powell also noted that the Fed “must keep at it [combatting inflation] until the job is done” and noted that in the 1970s, under then-Fed Chairman Paul Volcker, the Fed’s failure to act forcefully for “long enough” triggered a resurgence in inflation expectations that led to a dramatic rise in inflation and a need for drastically higher interest rate moves.

4. One of the Federal Reserve’s preferred measures of inflation, the personal consumption expenditures price index (PCE), came in softer than expected in July. The PCE showed a year-over-year rise of 6.3% in July, which was down from June’s 6.8% figure. The PCE also showed a month-over-month drop of 0.1%. Both figures were under economists’ projections. When looking at the so-called “core” PCE, which excludes food and energy prices which tend to be highly volatile, the figures showed a 4.6% rise year-over-year and a gain of 0.1% month-over-month. The core PCE figures were also softer than economists’ projections. Economists surveyed by the Dow Jones noted that they had been expecting a 4.8% year-over-year rise in core PCE and a 0.2% rise month-over-month. Fed Chair Powell noted that “While the lower inflation readings for July are welcome, a single month’s improvement falls far short of what the Committee will need to see before we are confident that inflation is moving down.” Atlanta Fed President Raphael Bostic told CNBC’s Steve Liesman that Friday’s PCE report would, however, make him lean more towards conducting a 50-basis point hike at September’s Federal Open Market Committee meeting instead of another 75-basis point hike. The PCE report was not all good news, however, showing that personal income growth for July came in at just 0.2%, and consumer spending rose only 0.1%. Economists surveyed by Dow Jones had expected increases of 0.6% and 0.5%, respectively, for each of these data points.

5. In the United Kingdom, Britain’s energy regulator announced that it will be raising its main cap on consumer energy bills to an average of £3,549 ($4,197 US) from a previous level of £1,971 per year. The move likely means that energy bills across much of the U.K. will rise by up to 80% starting October 1, and the regulator’s move to recalculating the caps every three months likely means that those costs could soar even further at the end of the year. Johnny Marshall, senior economist at the Resolution Foundation think tank, noted ahead of the announcement that “A catastrophe is coming this winter as soaring energy bills risk causing serious physical and financial damage to families across Britain. We are on course for thousands to see their energy cut off entirely, while millions will be unable to pay bills and build up unmanageable arrears.” U.K. businesses are not protected by the energy regulator’s caps and therefore could see hits to their bottom lines from both sides: an erosion of their consumer base as customers shift from spending on goods to spending on energy and erosion of profits by substantially higher energy cost inputs into the production of their goods.

6. Marco Alvera, chief executive of renewable energy firm TES-H2, appeared on CNBC’s “Squawk Box Europe” this week and discussed the coming European energy crisis. Alvera said, “Unless people are thinking of closing the borders of gas, which I haven’t heard anyone say, we should really think about this as a European gas crisis that can only be met with European solutions. With price caps, with other measures that are being asked, which now need to be urgently implemented.” Alvera went on to say, “We need to work now before the winter comes on solidarity mechanisms because we cannot have consumers and households freeze in one country and factories open in another country. We really need to agree as soon as possible that households and retail consumers come first.”

7. Russia has now been carrying out its unprovoked invasion of Ukraine for going on seven months, and there appears to be no quick end to the conflict in sight. The conflict appears that will now continue into winter in a devastating “war of attrition” that will likely wreak havoc on both sides of the war. On Thursday, Europe’s largest nuclear power plant – Russian-occupied Zaporizhzhia – was disconnected from the country’s power grid. Ukrainian President Volodymyr Zelenskyy said later that the world had narrowly avoided a radiation disaster solely because backup electricity kicked in that continued to allow the plant to operate in a relatively safe manner. The plant was reconnected to Ukraine’s power grid late on Friday, but Ukraine’s state nuclear company, Energoatom, noted later in the day that only one reactor at the plant was supplying the country with electricity for now.

8. Russia continued to squeeze European natural gas supplies this week as its state-owned energy giant Gazprom said that it would be shutting down the Nord Stream 1 pipeline at the end of the month for at least three days for “unscheduled maintenance.” Nord Stream 1 is Europe’s most significant piece of natural gas infrastructure and runs from Russia to Germany through the Baltic Sea. Gazprom claims the unscheduled shutdown is due to the pipeline’s only remaining compressor requiring service and said that gas flows should resume at 33 million cubic meters per day after September 2, when the maintenance is due to be completed. Gazprom also left itself room to delay that resumption when it said gas would be turned back on “provided that no malfunctions are identified” during the maintenance window. Holger Schmieding, the chief economist at Berenberg Bank, said in a research note regarding the latest shutdown, “On its own, a brief closure of the pipeline would not make a major difference, especially as Russia has reduced its gas exports through NS1 to 20% of capacity since July 27 anyway, but it highlights two grave risks: (i) Russia may falsely claim that it cannot reopen the pipeline afterward because of a ‘technical issue that could only be resolved if Western sanctions were lifted, and (ii) Russia may also shut down its other pipelines to Europe later on.” Schmieding noted that higher prices for ever-dwindling gas supplies would “worsen the serious recession into which Europe is falling already” and raise the likelihood that Germany will be facing a shortage of natural gas as winter arrives.

9. Oil prices saw a slight boost this week as Saudi Arabia indicated that OPEC may be open to cutting its output as demand continues to wane. The United Arab Emirates also indicated that it had aligned itself with Saudi Arabia’s thinking on oil markets, which is to cut production if Iranian oil returns to the market if Tehran manages to convince world leaders that it would return to the table in a nuclear deal with the West. Brent crude futures settled at $100.99 per barrel, while U.S. West Texas Intermediate crude settled at $93.06 per barrel.

10. The euro finally breached parity with the U.S. dollar this week, trading at two-decade lows on Tuesday morning at 0.9905 euros to 1 U.S. dollar. Analysts project that the battered currency will continue to slide lower as inflation persists across Europe, and an upcoming recession there appears to have now become a near certainty. The euro, after touching multi-decade lows for the week on Tuesday, attempted to recover to parity levels on Wednesday but could not maintain the upward momentum and was trading back near its lows for the week by mid-day. The euro tried again to recover parity against the U.S. dollar through late Wednesday afternoon but failed to breach the 1-to-1 level and had resumed sliding downward by Thursday afternoon. The euro attempted one last recovery on Friday but again could not maintain its momentum and will close out the week worth less than 1 U.S. dollar for the first time in twenty years.

11. The Japanese yen drifted briefly sideways against the U.S. dollar as the trading week opened but dipped into negative territory on Monday before rebounding into positive territory. The yen returned to negative territory Monday, sliding lower through the overnight hours to touch its lows for the week in the early morning hours of Tuesday. The yen bounced slightly higher as Tuesday morning went on, seeming to lose momentum again and returning near its lows before spiking back into positive territory around mid-day. The yen spent the rest of the week dipping higher and lower in a narrow trading band, but late on Friday slid lower again, dipping back into negative territory once more and closing out near its lows against the U.S. dollar for the week.

Comments from Federal Reserve Chairman Jerome Powell on Friday at the annual economic symposium in Jackson Hole, Wyoming, sent stock markets tumbling, with the Dow Jones Industrial Average losing over 1,000 points after a set of remarks that lasted only 8 minutes. Chair Powell was unapologetically “hawkish,” noting that the Fed was not going to take its foot off the rate-hike pedal until it was absolutely sure that inflation was being tamed. Powell noted that the Fed’s actions will likely cause “higher interest rates, slower growth, and softer labor market conditions,” which he noted will “bring some pain to households and businesses.” Powell also brought up former Fed chairman Paul Volcker, who sent interest rates soaring to 21% in the 1970s after the Federal Reserve failed miserably in its actions to bring down inflation expectations. Focus now turns to the next Federal Open Market Committee meeting and a slew of inflation data that is set to be released beforehand. Expectations had set in that the Fed might slow its pace of interest rate hikes after recent inflation data in the U.S. indicated that inflation may finally be topping out. Chair Powell’s comments on Friday sent those expectations flying, with analysts now returning to previous projections for another 75-basis point hike.

Inflation in Europe continues to rage, surging seemingly ever higher as the conflict between Ukraine and Russia grinds on. Russia’s continued insistence on taking down the Nord Stream 1 pipeline, which supplies much of Europe’s natural gas via Germany, has sent energy prices through the roof across all of Europe as governments attempt to stockpile stores of natural gas for heating purposes ahead of winter. A recession across Europe is now a near certainty as costs of goods, energy, services, and shelter all climb inexorably higher. The European Central Bank is expected now to enact rate hikes that may be on par with the U.S. Federal Reserve’s recent moves, which can be expected to send consumer prices even higher in the short term. As winter approaches and energy supplies for heating become scarce, many analysts expect industrial output to suffer, particularly in Germany, which has long been considered the “economic engine” for most of Europe. Slowing industrial activity will likely only exacerbate growing recessionary pressures in Germany as its GDP plunged in response. In the U.K., Britain’s energy regulator announced that it had reassessed the caps that were in place on consumer energy costs and that customers could expect to see their energy bills increase by up to 80 percent after October 1. The regulator also announced earlier this month that it would move from performing such reassessments on the caps every six months to a shorter window of three months as energy prices continue climbing. This likely means that consumers in the U.K. can see their costs rise even further by the start of 2023.

As inflation continues surging across Europe and elsewhere in the aftermath of the ongoing conflict in Ukraine and geopolitical tension continues to rise throughout the world, economic uncertainty remains a genuine and present issue. Stock market reactions to the comments of U.S. Federal Reserve chairman Jerome Powell proved yet again that analysts have been turning a blind eye to what is truly happening around them. Chair Powell said nothing new, confirming that the Fed will keep raising rates in its upcoming Federal Open Market Committee meetings until inflation has well and truly reversed course. Powell reiterated that one month’s worth of positive data showing easing inflation is not enough to convince the Federal Reserve that it should halt its actions and invoked the name of Paul Volcker, who took interest rates past 20% in the 1970s after a resurgence in inflation that occurred after the Fed paused its rate hikes too quickly. The Fed has been saying that it would keep at its current plan to hike rates until inflation was under control for months, but markets appeared to have convinced themselves otherwise, assuming that a month’s worth of better data was enough to create a pause, or slowdown, in rate hikes. Friday’s moves proved yet again the importance of diversifying an investment portfolio so that it is not overexposed to sudden market moves driven by negative headlines. Many investors have continued adding physical precious metals into their portfolios for this purpose whenever temporary price dips have afforded them the option to do so at a relative discount. These same investors watched as the percentage drop in metals for the week, except for Platinum which has seen a drastic increase in volatility due to the war in Ukraine, came nowhere near matching the slide in stocks on Friday. 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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