The Precious Metals Week in Review – September 23rd, 2022

1. This week saw the Federal Reserve raise interest rates yet again and a flood of information out of Europe that served to further increase recession fears. Stock markets tumbled again on Friday, with the Dow Jones Industrial Average closing at fresh lows for 2022 as global currencies mostly slid lower against the US dollar.

2. For the week ending September 17, the seasonally adjusted number of Americans filing initial claims for unemployment jumped by 5,000 from the previous week’s revised level to reach a new level of 213,000. The previous week’s level was revised lower by 5,000 claims, making the net claim move essentially 0. The 4-week moving average of claims was 216,750, a decrease of 6,000 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 1,250 claims.

3. The U.S. Federal Reserve held its latest Federal Open Market Committee meeting to determine the near-term course of monetary policy and opted to raise interest rates once again by 75 basis points. The central bank also indicated that it would continue to hike rates well past their current level to aggressively tamp down inflation. Speaking after the decision, Fed Chair Jerome Powell said, “My main message has not changed since Jackson Hole. The FOMC is strongly resolved to bring inflation down to 2%, and we will keep at it until the job is done.” Powell commented further, saying, “No one knows whether this process will lead to a recession or, if so, how significant that recession will be.” Bill Zox, a portfolio manager at Brandywine Global, referring to the Fed’s new proclivity to carry out 75 basis point hikes, said, “I believe 75 is the new 25 until something breaks, and nothing has broken yet. The Fed is not anywhere close to a pause or a pivot. They are laser-focused on breaking inflation. A key question is what else might they break?”

4. Other central banks worldwide followed the Federal Reserve on its monetary policy stance. In what may be a pivotal week in the global fight against inflation that the world’s central banks are engaged in, interest rates around the world were raised a combined total of 350 basis points. In the current rate-hike cycle to date, central banks in the 10 largest developed economies have raised rates by a combined 1,965 basis points. Japan remains the only holdout, sticking to its “dovish” ultra-low rates policy. Japan had to directly intervene in currency markets this week to attempt to halt a dramatic plunge in the yen, the first time it has done so since 1998.

5. As most of the world’s central banks raised interest rates this week, the U.S. dollar skyrocketed to multi-decade highs against the currencies of their respective countries. On Friday, following a week of market turmoil, the U.S. dollar closed at its highest level against a basket of other currencies since May of 2002. John Kilduff, a partner at Again Capital LLC in New York, told CNBC, “We had the dollar exploding higher and pushing down dollar-denominated commodities like oil and growing fears over the looming global recession that is coming as the central banks raise interest rates.”

6. In a note to clients on Friday, Citi’s Dirk Willer said, “The likelihood of a US recession in 2023 is increasing given the hawkish Fed. While it is widely understood that earnings estimates are too high given such recession risk, the market is unlikely to be able to look through falling earnings, as valuations also typically compress.” Willer continued, saying, “Our charts suggest that the case for a Nov/Dec rally crucially depends on how well the market has been doing going into year-end. Only when Jan to October returns were strong has a year-end rally been in the cards. This year, Santa may not deliver.” Willer was referring to the so-called “Santa Claus Rally” that most stock analysts are hoping will put in an appearance after the November mid-term elections in the U.S.

7. Global government bond yields continue to skyrocket on the interest rate moves of central banks. Peter Boockvar, chief investment officer at Bleakley Financial Group, said of the surge in bond yields, “Bottom line, all those years of central bank interest rate suppression, poof, gone. These bonds are trading like emerging market bonds, and the biggest financial bubble in the history of bubbles, that of sovereign bonds, continues to deflate. If the world’s central bankers didn’t decide to play God over the cost of money, we wouldn’t be now going through the aftermath.”

8. Russia doubled down on its invasion of Ukraine this week as Russian President Vladimir Putin announced a “partial military mobilization” and said 300,000 reservists were being called to duty. The move triggered a relatively large-scale attempt by thousands to try to exit Russia, creating traffic snarls at airports and some borders. Referendums in Russian-occupied areas of Ukraine began on Friday in what Ukraine and its Western allies say is an illegal attempt to seize large swathes of Ukraine. Ukrainian President Volodymyr Zelenskyy urged Ukrainians in the affected regions to undermine the referendums and share information on the individuals conducting “this farce.” In Luhansk, Governor Serhiy Haidai said that Moscow-backed local authorities were sending armed escorts to accompany election officials and for them to note the names of individuals who voted against joining Russia.

9. Oil prices were lower again this week, dropping to an eight-month low on Friday as the U.S. dollar surged to its most substantial level in over 20 years. The move appears to have been primarily driven by fears that rising interest rates around the world will push its major economies over into recession, which would likely cut demand for oil. Brent crude futures ended the week at $86.46 per barrel, while West Texas Intermediate crude settled at $79.10 per barrel.

10. The euro slid steadily lower against the U.S. dollar for most of the week as interest rates worldwide shot higher. In early trading, the downward drift was fairly shallow, but the drop accelerated as most of the world’s central banks followed the Federal Reserve in raising their interest rates to battle surging inflation. The euro continues to trade at multi-decade lows against the dollar, closing the week out at just 0.9690 euros to 1 U.S. dollar.

11. The Japanese yen also spent the first part of the week drifting lower against the U.S. dollar but shot vertically higher on Thursday after the Japanese central bank, instead of opting to raise interest rates as the Fed did choose to keep its ultra-low rate policy and intervene directly in the currency markets for the first time since 1998. The intervention sent the yen into positive levels for the week, touching its highs late on Thursday before reversing and moving back near opening levels overnight. The central bank’s efforts were primarily seen as futile by the rest of the world, and the yen managed to close out the week only marginally to the upside against the U.S. dollar.

Market volatility remains extreme, with equity markets worldwide continuing to slide lower as the threat of a global recession looms larger on the horizon. As the U.S. Federal Reserve continues its pattern of rate hikes, indicating that there is more “pain” to come from additional hikes, it is essentially exporting inflation to other nations by causing U.S. goods to be more expensive in the overseas markets they are exported to. Each rate hike also cuts into the profits of U.S. multinational corporations as the dollar grows stronger against other currencies. This could push corporate earnings lower and weaken both the U.S. and the global economy even further. A growing global currency crisis could force the Federal Reserve to change direction, however, despite not having reached its 2% target for inflation. As of Friday, the British pound was at its lowest level against the U.S. dollar since 1985, the euro continues to trade under $1, and the Japanese yen dropped to 24-year lows before the Bank of Japan intervened directly in currency markets. Emerging market currencies are mirroring the moves of the others, and all of this could trigger a currency crisis that could force the Fed into pausing its planned rate hikes or even return to rate cuts before it has managed to tame inflation. The Federal Reserve has been widely criticized, even by its own officials, for its early decision to cut rates in the 1970s before inflation was under control. The resulting resurgence of inflation forced the Fed to aggressively raise rates to over 15% by 1981.

Geopolitical uncertainty can be expected to continue in the near term. Russia’s invasion of Ukraine will likely escalate after Moscow announced it was calling up 300,000 reservists in a “partial military mobilization.” Russian-backed officials in occupied regions of Ukraine began referendums on Friday that the Western world views as illegal and largely a thinly veiled attempt to seize additional territory that it did not get when it “liberated” Crimea from Ukraine in 2014. On Friday, a panel of experts commissioned by the United Nations reported that it had found evidence of war crimes committed by Russian troops after they invaded Ukraine. The commission investigated 27 towns, graves, and alleged torture centers, according to the Associated Press. Russia was supposed to have been in attendance when the group presented its evidence but did not show up and has made no statement regarding the findings. Whether the world itself will act on the evidence remains to be seen. Russia could face even harsher sanctions than it is already under and possibly further alienate itself from its supposed allies, particularly India and China.

As geopolitical, economic, and environmental uncertainty escalates, equity markets have shown signs of beginning to fracture. Global equity markets moved downward almost in parallel this week as central banks mostly continued raising rates to try to keep battling inflation. Investors watching these volatile moves continue to try to take steps to make sure that their portfolios are diversified enough to survive the downturn. Many investors continue to seek out alternative investments, such as physical precious metals, that showed signs of being underbought prior to the equity and real estate bubbles beginning to deflate. Many of these investors have continued to utilize temporary price dips in physical precious metals to acquire the further products as part of their diversification plans. 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 without overextending your ability to maintain its ownership.

Trading Department – Precious Metals International, Ltd.

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