The Precious Metals Week in Review – September 9th, 2022

1. It was a news-filled week, and market volatility remained elevated as each headline broke. The week was largely dominated by the sad news of the death of Queen Elizabeth II in the United Kingdom. The conflict between Russia and Ukraine continues to rage on, with Ukraine making severe efforts at counterattacks on Russian-occupied positions.

2. For the week ending September 3, the seasonally adjusted number of Americans filing initial claims for unemployment dropped by 6,000 from the previous week’s revised level to reach a new level of 222,000. The previous week’s level was revised lower by 4,000 claims. The 4-week moving average of claims was 233,000, a decrease of 7,500 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 1,000 claims.

3. Federal Reserve Governor Christopher Waller said on Friday that he expects another significant interest rate increase when the Federal Open Market Committee meets later this month. The “blackout period” for the Fed begins next week, just when the latest inflation report is due to be released, so markets will have to rely solely on anything that was said this week to attempt to forecast the Fed’s next move. Waller said, “Looking ahead to our next meeting, I support another significant increase in the policy rate. But, looking further out, I can’t tell you about the appropriate path of policy. The peak range and how fast we will move there will depend on data we will receive about the economy.” Waller’s comments are in close alignment with similar ones made by Fed Chair Jerome Powell, Vice Chair Lael Brainard, and other Fed officials. All have professed that the Fed will keep hiking rates until inflation returns close to its 2% target. Waller also suggested that the Fed may be considering a move away from providing any sort of forwarding guidance, saying, “I believe forward guidance is becoming less useful at this stage of the tightening cycle. Future decisions on the size of additional rate increases and the destination for the policy rate in this cycle should be solely determined by the incoming data and their implications for economic activity, employment, and inflation.”

4. The United Kingdom, and much of the rest of the world, was saddened by the news this week that Her Majesty Queen Elizabeth II passed away peacefully at Balmoral Castle in the Highlands of Scotland on Thursday. At 96 years old, Queen Elizabeth was Britain’s longest-ruling monarch and saw massive changes take place throughout the world in her over 7 decades of rule. The U.K., under the leadership of its new King, Charles III, will enter a period of mourning. King Charles will begin his reign amid a period of massive geopolitical and economic uncertainty in the U.K.

5. In Europe, the European Central Bank announced that it was conducting a 75 basis point interest rate hike, which takes its benchmark deposit rate to 0.75%. The central bank, which is responsible for monetary policy across the 19 member nations that use the euro, has kept rates in negative territory since 2014. In a statement following the announcement, the ECB said, “This major step frontloads the transition from the prevailing highly accommodative level of policy rates towards levels that will ensure the timely return of inflation to the ECB’s 2% medium-term target.” The ECB added that it “expects to raise interest rates further because inflation remains far too high and is likely to stay above target for an extended period.” The central bank revised its inflation expectations upwards, forecasting an average rate of 8.1% in 2022, 5.5% in 2023, and 2.3% in 2024.

6. In Ukraine, a series of counteroffensives was launched that saw the beleaguered country retake 1,000 square kilometers (386 square miles) of territory from Russian troops. The head of Ukraine’s atomic energy operator accused Russia of trying to “steal” the Zaporizhzhia Nuclear Power Plant from Europe by cutting it off from the electricity grid in Ukraine, leaving it on the verge of perhaps the world’s worst nuclear accident. The plant has been cut off from the power grid in Ukraine since Monday, leaving it no outside source for electricity to power its own systems. The only power source for the plant is just one of its six reactors, according to Energoatom chief Petro Kotin. Kotin noted that the employees at the plant “are trying to keep this unit running as much as possible, but eventually it will have to be shut down, and then the station will switch to diesel generators, the station’s last defense before a radiation accident.”

7. European Commission President Ursula von der Leyen discussed a five-point plan that European Union energy ministers might use when it meets on Friday in Brussels for emergency talks on how best to ensure households and businesses across Europe have some measure of protection from surging gas and energy prices as they prepare for winter. Part of the plan she outlines calls for a price cap on Russian gas, a windfall tax on fossil fuel profits, a mandatory target for households and businesses to reduce energy usage, and emergency credit lines for power companies. Russian President Vladimir Putin slammed the plan when he heard the news that price caps on Russian oil were being considered, saying that he would rip up existing supply contracts if such a measure was imposed and warning that he was prepared to let Europe “freeze” over the winter. Russian Foreign Ministry spokeswoman Maria Zakharova warned on Friday that “The collective West does not understand: the introduction of a cap on prices for Russian energy resources will lead to a slippery floor under its own feet.”

8. Oil prices were only slightly lower for the week even though Russian President Vladimir Putin threatened to completely halt oil and gas exports to Europe if price caps were imposed on Russian oil. OPEC+, which still includes Russia, agreed to a small cut to output, which lent prices some support. Brent crude ended the day settling at $92.45 per barrel, while West Texas Intermediate crude settled at $86.65 per barrel.

9. The euro opened the week still below parity with the U.S. dollar and initially slid even lower. The euro bounced along in a narrow trading range, with a slight drift to the downside, until Wednesday, when it moved sharply into positive territory. The move did not take it back to even with the U.S. dollar, and the euro drifted sideways into Thursday’s trading. On Thursday, shortly after the announcement of Queen Elizabeth II’s death, the euro dipped initially lower but quickly reversed course and finally moved back above parity with the U.S. dollar. A drop just before market close took the euro back near even with the U.S. dollar once more, but it will still finish the week out slightly higher than the dollar.

10. The Japanese yen opened the week sliding sideways against the U.S. dollar but soon began dropping lower, in a relatively steep decline that started overnight on Tuesday. The yen continued dropping through Wednesday, touching its lows around mid-day and then immediately bouncing off them. The yen struggled weakly to move higher through the rest of Wednesday and Thursday and finally began to accelerate its climb higher overnight on Thursday. The yen moved higher through most of Friday, but a dip slightly lower just before market close will ensure that it will finish out the week slightly to the downside against the U.S. dollar.

Markets will likely continue to be volatile as they enter the coming months. Monetary policy moves by the world’s central banks, the energy crisis facing Europe as winter approaches, a growing energy crisis in the United States, particularly the state of California, the ongoing war between Russia and Ukraine, China’s ongoing “Zero Covid” policies, and Mother Nature itself are all triggering highly elevated levels of geopolitical and economic uncertainty. Also occurring within the coming months, a transition to the new rule in the U.K., mid-term elections in the United States, and China’s National Communist Party Congress meeting could all see shifts in governing policies of each of those nations. Markets seem to largely be ignoring the latter, choosing to focus, with what is approaching tunnel vision, on the moves by the world’s central banks to tighten monetary policy. In the larger picture, rising interest rates, combined with growing debt levels among both the world’s consumers and the businesses which supply them, could be the proverbial economic powder keg primed to explode.

The death of Queen Elizabeth II was met with great sadness across the United Kingdom and much of the rest of the world. It will start a new era for the U.K., facing growing economic uncertainty as it faces its worst economic outlook in years, a surging cost-of-living crisis, its own growing energy crisis, and skyrocketing inflation. In her final act of service, the Queen appointed Liz Truss as the new prime minister to replace outgoing PM Boris Johnson. Ms. Truss takes charge during a period in which no government announcements will be made, and everyday politics are suspended until after the Queen’s funeral. The Bank of England also postponed its monetary policy meeting by one week.

In the U.S., a week out from the release of new inflation data, the Federal Reserve will go into a “quiet period” ahead of its next Federal Open Market Committee meeting to set near-term monetary policy. Most market analysts are projecting that the Fed will conduct at least one more 75 basis point hike at this month’s meeting before reconsidering the size of future hikes. In an address on Thursday, Fed Chair Jerome Powell cautioned that it is essential to get inflation down to lower levels now before the public expects the higher prices they are paying to be the “new normal.” Powell said, “History cautions strongly against prematurely loosening policy. I can assure you that my colleagues and I are strongly committed to this project, and we will keep at it until the job is done.”

Thursday’s event, a Question-and-Answer session presented by the Cato Institute, will be the last scheduled public appearance for Powell until after the next FOMC meeting on September 20-21. The Bank of England has postponed its monetary policy meeting in honor of the Queen’s passing, so markets will also have to wait to see if they, too, will be continuing their pace of interest rate hikes.

Geopolitical, economic, and environmental uncertainty can be expected to continue in the near-term. Real estate markets are finally showing signs of strain, with many real estate analysts beginning to comment that the bubble in housing may be ready to burst again, as it did in 2008, which was the trigger for the financial crisis that eventually enveloped the globe. Savvy investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Many of these investors continue to seek out buying opportunities in the form of temporary price dips that allow them to add more physical precious metals into their portfolios as part of their diversification plans. Such investors continue to hold to the view that physical precious metals have a long history of acting as a hedge against inflationary periods and times of both economic and geopolitical uncertainty. 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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