The Precious Metals Week in Review – September 2nd, 2022

1. Volatility continued to be at extremes this week in the wake of Fed comments from the annual economic symposium in Jackson Hole, Wyoming. The ongoing war between Russia and Ukraine continues to spread uncertainty throughout most of Europe, particularly those nations physically close to Ukraine who fear that Russia may not stop at the Ukrainian border in its ambitions to annex territory. Markets rose immediately after the release of Non-Farm Payrolls data in the U.S. on Friday, but news headlines surrounding Russia’s moves regarding the Nord Stream 1 pipeline later in the day sent them tumbling lower in the afternoon. In the U.S. and Canada, Monday will be a holiday as markets in the two countries are close to celebrating Labor Day.

2. For the week ending August 27, the seasonally adjusted number of Americans filing initial claims for unemployment dropped by 5,000 from the previous week’s revised level to reach a new level of 232,000. The previous week’s claims level was revised lower by 6,000. The 4-week moving average of claims was 241,500, a decrease of 4,000 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 1,500 claims.

3. The U.S. Non-Farm Payrolls Report for August was released on Friday, and the data was just under economists’ expectations. Non-Farm payrolls rose by 315,000 in August, versus a Dow Jones estimate of 318,000. This is the slowest monthly gain for payrolls since April 2021. The unemployment rate jumped to 3.7%, which was 0.2% higher than expected. A broader measure of unemployment, which includes discouraged workers as well as those that hold part-time jobs for economic reasons, jumped to 7% from 6.7%. Hourly wages were up 0.3% for the month, and 5.2% from one year ago, which was slightly lower than expected. Michael Arone, the chief investment strategist at State Street Global Advisors, said, “There’s something for everybody in this report. This report supports the Fed’s ability to engineer a soft landing. Markets like it.” Arone continued, saying that the report is “not strong enough to get them [the Federal Reserve] to be more aggressive in terms of rate hikes, and not weak enough to have them slow down. I don’t think today’s jobs report changes anything about the path the Fed was on.” Other analysts were optimistic about the data as well, with Liz Ann Sonders of Charles Schwab saying, “This is a unique period of time, where we have still a relatively tight labor market, where there is still job growth, but companies have started to announce hiring freezes, some companies have announced layoffs. This could very likely be a recession where you don’t see the kind of carnage in the labor market that you see in most recessions.”

4. Mortgage rates in the U.S. jumped again last week, moving to 5.8% from the previous week’s 5.65% and sending mortgage demand lower. Mortgage applications to purchase a home dropped by 2% for the week and are 23% lower than the same time period one year ago. Refinancing activity has also dipped as rates have risen, dropping to 30.3% of total mortgage applications from roughly 66% one year ago. Taken as a whole, overall mortgage applications were down 3.7% for the week and 63% lower for the year. Mortgage rates began climbing again last week as Fed officials all seemed to be talking out of the same book at Jackson Hole, Wyoming, all hinting that short-term interest rates would essentially “stay higher for longer” regardless of any interim data showing signs that inflation may be easing. In other words, the Fed plans to keep its foot on the rate-hike pedal until it is absolutely sure that inflation is well and truly on its way back to its 2% target. Many analysts, after only a couple of positive reports on inflation-related data, had begun to predict that the Fed might slow down the amount and pace of interest rate hikes in a shorter time frame.

5. In a year marked by geopolitical and economic uncertainty, the planet itself seems to be weighing into the fray and adding to the chaos. In addition to the ongoing conflict in Ukraine, which has caused its own set of agricultural and other supply chain issues, droughts, floods, and fires have all begun to take their toll across the planet. The overall global supply chain was already stressed because of economic shutdowns that were imposed as Covid-19 began to spread around the world in early 2020, but recent events have pushed those stress levels to new highs. The latest supply chain shock may be coming from another crop in the agricultural sector – cotton. The world’s top-five cotton-producing countries are now all facing a crisis in a crop that is vital to so many other industries. In Pakistan, this week, up to half of their cotton crop has now been damaged or destroyed through catastrophic flooding. Pakistan contributes around 6% to the world’s global cotton supply. India has also dealt with climate-related events, with heavy rain and pests destroying much of its cotton output. In the U.S., Texas – which is its largest cotton producer, cotton crops have been blasted by drought. Texas expects its cotton output to be roughly half of normal levels this year, leading to the U.S. Department of Agriculture slashing its total cotton production forecast for the U.S. by 28%. The U.S. is the third largest global producer and is a top exporter of cotton to the world.

6. The head of the International Atomic Energy Agency, Rafael Grossi, announced that a team of inspectors had finally been allowed to visit the Russian-occupied Zaporizhzhia nuclear power plant in Ukraine. Grossi told reporters, “We are not going anywhere. The IAEA is now there, it is at the plant, and it is not moving. It is going to stay there.” Ukraine’s state energy company said on Friday that reactor number 5 had been reconnected to the power grid but noted that three others remain offline. Via social media platform Telegram, Energoatom said, “Today, September 2, 2022, power unit No. 5 of the Zaporizhzhia nuclear plant, which was disconnected as a result of another mortar shelling by the Russian occupying forces at the Zaporizhzhia site, was connected to the power grid at 1:10 p.m. Currently, two power units are operating at the station, which produces electricity for the needs of Ukraine.”

7. As was widely expected, Russia’s state-owned energy giant, Gazprom, announced this week that its “maintenance outage” on the Nord Stream 1 pipeline, which was expected to last only until September 3, would be extended indefinitely. The energy company announced that “Gas transportation to the Nord Stream gas pipeline has been completely stopped until the issues on the operation of the equipment are eliminated.” Gazprom claims that it discovered an engine oil leak during its self-imposed “maintenance outage” that must be addressed before it can bring the pipeline back online and says it can no longer give a timeline on when gas flows might be restored into Europe.

8. Russian Foreign Minister Sergey Lavrov warned Moldova this week that any threat against the security of Russian forces in the so-called “breakaway region” of Transnistria would be considered an attack against Moscow. It has long been speculated that Russia’s goals in invading Ukraine were more significant than just seizing portions of its Eastern territory. Lavrov’s comments towards Moldova may be setting the stage for an incursion into that country to “liberate” Transnistria from Moldova in the same way that it is trying to “liberate” the Donbas region away from Ukraine.

9. Oil prices were lower this week, posting their worst weekly drop in the last four as ongoing Covid-19 measures in China and weakening global growth are becoming more likely to impact demand for crude. OPEC+ is slated to meet on September 5, which will be Labor Day in Canada and the U.S., and they are widely expected to discuss output cuts. In China this week, the city of Chengdu ordered renewed lockdowns on Thursday due to Covid-19 conditions, which will likely impact some automotive manufacturers, such as Volvo. Renewed fears over the energy outlook across Europe as Russia continues to squeeze its neighbors via its Nord Stream 1 output cuts could impact energy prices over the long weekend. G-7 nations have apparently begun discussing price caps on Russian oil, for which Moscow says it will retaliate. JP Morgan Chase noted that in a worst-case scenario, if Russia opts to pull its oil off global markets, the world could be looking at paying nearly $380 dollars per barrel of oil. Prior to the news of Russia’s further cuts to Nord Stream 1 flows, Brent crude futures were at $94.05 per barrel, while U.S. West Texas Intermediate crude was at $88.33 per barrel. Brent crude ended the day settling at $93.02 per barrel, while West Texas Intermediate crude settled at $86.87 per barrel.

10. The euro opened below parity with the U.S. dollar to start the week and immediately slid further lower, briefly touching its lows for the week Monday morning but quickly reversing and breaking back above the parity mark. The euro drifted sideways at levels nearly even with the dollar through the rest of Monday and Tuesday morning, then attempted to regain further ground throughout Tuesday afternoon. Late Wednesday, the euro dipped back below parity with the dollar once more but again quickly rebounded and had moved to its highs for the week by Wednesday evening. The euro remained above parity with the dollar through most of Wednesday and Thursday, but by late Thursday slid sharply lower again, nearly touching its lows for the week a second time. Late Thursday afternoon, the euro began steadily moving higher and had again moved higher than the U.S. dollar just before the close on Friday. After news of Russia completely cutting off gas flows through Nord Stream 1 broke on Friday, the euro plunged lower and will close out the week once again worth less than 1 U.S. dollar.

11. The Japanese yen slid lower against the U.S. dollar in a narrow band as trading opened for the week. By Monday, the yen began mainly moving sideways against the dollar and maintained that pattern through Tuesday and on into Wednesday. On Wednesday, the yen began dropping steadily lower against the dollar, still in a narrow trading range, and continued that trend into Friday, when it touched its lows for the week. The yen rebounded slightly on Friday, but nowhere near enough to regain its opening levels, and will close out the week lower against the U.S. dollar.

The U.S. Non-Farm Payrolls Report had markets buoyed on Friday after it came in close to market expectations. Many analysts immediately took to the airwaves to project that the Federal Reserve may opt to raise rates by only 50 basis points when it meets later this month, given recent softer inflation data and a jobs report that was primarily within expectations. The elation was relatively short-lived as news broke that the G-7 nations were discussing a potential cap on Russian oil prices, for which Russia very clearly said it would immediately retaliate, and then later in the day, Russia’s state-owned energy giant, Gazprom, announced that it was shutting down natural gas flows through the Nord Stream 1 pipeline into Europe completely. Ostensibly the shutdown was due to the discovery of an “oil leak” during Gazprom’s recent unscheduled maintenance on what it says is the sole remaining pump responsible for the pipeline’s functionality. The shutdown was apparently unrelated to the price cap discussions, given that the G-7 is far away from taking any sort of action on capping the price of Russian oil, but it was yet another stark reminder of just how much Europe depends on Russian energy exports.

Elsewhere in Europe, rivers are running dry in France, Germany, Italy, and even England. Heatwaves and a massive lack of rainfall that has plagued the region since May show no sign of letting up, and drought conditions are now at extreme levels, triggering concerns that food and energy production across Europe could be impacted even more so than they already have been due to the conflict between Russia and Ukraine. In France, it is now possible to cross the Loire River on foot in many places. In Germany, the Rhine River levels remain critical and could soon lead to that key waterway being closed off to commercial traffic again. In Italy, the Po River is now so low that long-hidden relics from World War II are being discovered, including a previously undetonated bomb. Matthew Oxenford, a senior analyst of Europe and climate policy at The Economist Intelligence Unit, which is a research and advisory firm, told CNBC via telephone that “We haven’t seen this level of drought in a very long time. The water levels in some of the major waterways are lower than they have been in decades. For some of the main channels, there’s very little leeway, sometimes less than 30 centimeters of leeway, before the channel is completely inoperable for any sort of shipping. So that’s going to have very significant impacts on the economic and human activity that’s taking place around these waterways seeing as we’re likely to remain in some form of drought for some time to come.” The drought plaguing Europe is being described as “the worst drought in at least 500 years” according to analysis from the European Union’s Joint Research Center. In early August, the Global Drought Observatory reported that nearly two-thirds of Europe was under drought warnings and that in those regions, the soil had dried up and vegetation was showing “signs of stress.” The report found that water and heat stress had “substantially reduced” summer crop yields. Reduced crop yields in Europe, China, the U.S., and other drought-stricken nations will drive food and textile prices even higher than they already are. Inflation across the eurozone surged to a new record high of 9.1 in August.

Crops are not the only victim of the drought that is plaguing Europe, China, and North America. Power generation is taking a hit, and the heat and lack of water drag on. Warming temperatures in France’s rivers as the water levels drop threaten to reduce nuclear output, which was already at low levels, as warmer water fails to cool reactors efficiently. Reuters reported that the French nuclear power regulator has extended temporary waivers that allow five power stations to discharge hot water into rivers as fears of a looming energy crisis take hold. In Norway, which relies heavily on hydroelectric power, the lack of rain has caused output levels at many dams to drop significantly, and the Norwegian government announced that it plans to limit power exports. The Western U.S. is also facing a similar crisis as the drought-stricken region also sees water levels evaporating away. China, too faces similar conditions as its Yangtze River water levels drop.

As geopolitical, economic, and environmental uncertainty continues across the globe, analysts find themselves in uncharted territory. Stocks, which had moved higher on the Non-Farm Payrolls report news in the U.S., reversed course and sold off as news from the energy sector overshadowed what would typically be a critical report for the markets. The NASDAQ saw its sixth straight losing day this week after Friday’s selloff. Real estate also suffered again this week, with indications that housing prices may have cooled, with what seems to be a clear bubble about to burst as mortgage rates climb higher. Many investors continue to seek out alternative investments that they can add to their portfolios in an effort to diversify them away from overexposure to equity markets, real estate, and other asset classes that seem to all be in bubbles. Many of these investors continue to add physical precious metals to their portfolios as part of their diversification plans, given that they seem to remain undervalued when compared to the price movements for other asset classes. As volatility in other market sectors has contributed to wild swings, savvy investors have used temporary price dips in precious metals as buying opportunities to acquire more physical products for their portfolios. Given precious metals’ long history of being viewed as a store of value during times of geopolitical turmoil and economic uncertainty, these investors continue to hold to the long-range view that utilizing price dips to acquire additional products when they have the means to do so may be beneficial in the long-run, given the current state of global conditions. 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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