The Precious Metals Week in Review – September 30th, 2022

1. This week saw a further increase to volatility and a massive economic impact in the U.S. in the form of catastrophic hurricane Ian, which made landfall in Florida mid-week, and is expected to make another landfall in South Carolina before it is finished with the U.S. Equity markets wrapped up their worst month since 2020 and were on track for one of the worst quarterly performances since 2020 as well. It was the worst September for the DJIA since 2002.

2. For the week ending September 24, the seasonally adjusted number of Americans filing initial claims for unemployment plunged by 16,000 from the previous week’s revised level to reach a new level of 193,000. The previous week’s level was revised lower by 4,000 claims. The 4-week moving average of claims was 207,000, a decrease of 8,750 from the previous week’s revised moving average. The previous week’s moving average was revised lower by 1,000 claims.

3. The state of Florida went through one of the most catastrophic hurricanes to hit the U.S. in recorded history. Hurricane Ian made landfall as a borderline category 5 storm near Fort Myers and Naples on Wednesday and its slow forward movement and massive size left a wake of destruction that is staggering to behold. The storm slowly moved across the southern and central portion of the state on Wednesday, driving storm surge ahead of it and taking down trees and power lines as it went. Ian finally exited into the Atlantic on Thursday, where it regained enough strength to make a second landfall in South Carolina as a category 1 storm on Friday afternoon. The devastation in Florida alone will likely have a significant impact on the U.S. economy as businesses, residents, and insurance companies all struggle to recover from the storm. How South Carolina fares remains to be seen as it will likely be the end of the weekend before the weather improves. Though the storm did weaken prior to its second landfall, the area it is coming ashore in South Carolina will surely suffer from significant storm surge. Building materials, which remain at historically high levels, will likely see another surge in prices as demand skyrockets due to the need for repairs following the storm.

4. One of the Federal Reserve’s favorite gauges of inflation, the Personal Consumption Expenditure price index (PCE), jumped by 0.6% (excluding food and energy) in August after it had been flat in July. Including food and energy, headline PCE rose 0.3% in August even with a sharp decline in gas prices at the pump. The increase puts the Fed’s 2% inflation target even further away. After July showed flat readings for core PCE, and even a slight decrease in headline PCE, most analysts had begun to hope that inflation had peaked and could be on the verge of a decline. August’s readings proved their hopes to be fruitless.

5. U.S. Federal Reserve vice-chair Lael Brainard doubled down on the Fed’s stance on inflation this week, saying “Monetary policy will need to be restrictive for some time to have confidence that inflation is moving back to target. For those reasons, we are committed to avoiding pulling back prematurely.” She went on to say, “Inflation is very high in the United States and abroad, and the risk of additional inflationary shocks cannot be ruled out.” Brainard acknowledged that the Fed’s moves could have spillover effects to other nations, saying “On balance, dollar appreciation tends to reduce import prices in the United States, but in some other jurisdictions, the corresponding currency depreciation may contribute to inflationary pressures and require additional tightening to offset.”

6. The Bank of England proved Vice-chair Brainard’s remarks to be true this week after the British pound fell to a historic low against the U.S. dollar this week. On Monday, the pound Sterling fell by as much as 4.8% against the dollar, trading below $1.04. Bank of England Governor Andrew Bailey said in a statement, “The Bank is monitoring developments in financial markets very closely in light of the significant repricing of financial assets. The role of monetary policy is to ensure that demand does not get ahead of supply in a way that leads to more inflation over the medium term. The MPC (Monetary Policy Committee) will not hesitate to change interest rates as necessary to return inflation to the 2% target sustainably in the medium term, in line with its responsibility.”

7. Elsewhere in Europe, in the Euro zone, inflation spiked to 10% in September according to Eurostat data which was released on Friday. The data showed that price increases were spreading out from food and energy, which are considered the most volatile, into all other segments of the economy of the 19-member bloc. Energy prices were up 40.8% from one year ago, while food, alcohol and tobacco were up 11.8%. So-called core inflation in the Euro zone, which excludes food and energy costs, were up 4.8% on the year, up from August’s reading of 4.3%. The reading will likely increase pressure on the European Central Bank to hike rates more aggressively when it meets in October. Many economists expect the inflation situation in Europe to get worse before it begins to turn around.

8. The controversial Nord Stream pipelines linking Russia to Germany via the Baltic Sea remain front and center in the ongoing energy crisis now plaguing Europe. On Monday, seismologists detected explosions in near the Nord Stream 1 and Nord Stream 2 pipelines, followed by a drop in pressure on both pipelines. Nord Stream 1 had stopped pumping gas earlier this month, while Nord Stream 2 had never officially begun operating due to Germany’s refusal to certify it for commercial operations after Russia invaded Ukraine. Even though neither pipeline was supposed to have been actively pumping gas, visible gas leaks have now been detected in the Baltic Sea. Both Russia and Europe say that sabotage cannot be ruled out, with Spain’s Energy Minister Teresa Ribera placing outright blame on Moscow, telling Reuters “It was a deliberate act and in my opinion it can very likely be linked to the push for constant provocation by the Kremlin.” Denmark’s armed forces analyzed video footage of the largest gas leak in the Baltic and said it was roughly 1 kilometer (0.62 miles) in diameter. Footage of the second leak showed a surface disturbance roughly 200 meters across. The incident gives Russia further excuse to refrain from shipping gas supplies into Europe ahead of the critical winter months. European Union policy chief Josep Borrell warned that the EU would take “robust and united” retaliatory measures if it could prove the pipelines were deliberately sabotaged. An unconfirmed CNN report citing three different anonymous sources said that European security officials observed Russian navy support ships and submarines in the areas affected by the leaks this week. The Kremlin, when asked to respond to the CNN report, said deflected, saying that there was a much larger NATO presence in the area.

9. Russia continued its unprovoked seizure of Ukrainian territory this week following the outcome of referendums in Russian-occupied territories that nearly every nation in the world except for Russia itself viewed as a complete sham. In a televised ceremony from the Kremlin in Moscow, Russian President Vladimir Putin declared that “there are four new regions of Russia.” The territories in question are Luhansk and Donetsk in Eastern Ukraine and Kherson and Zaporizhzhia to the south. Putin said, “The results [of the referendums] are known, well known.” Moscow now claims these areas and the citizens that live within them belong to Russia and has warned that it now has “the right” to use nuclear weapons defend its territory and citizens if it feels that there is cause. Ahead of Putin’s declaration, United Nations Secretary-General Antonio Guterres said that the referendums “would have no legal value and deserves to be condemned.” Guterres further said, “It stands against everything the international community is meant to stand for. It flouts the Purposes and Principles of the United Nations. It is a dangerous escalation. It has no place in the modern world. It must not be accepted.” In 2020 Russia, under Putin’s leadership, changed its constitution making it illegal for Russia to give away any part of its territory to a foreign power. This change means that now that Russia has claimed further territory from Ukraine, it is unlikely to ever cede it back. The so-called G7 nations have vowed to implement harsher sanctions on Russia over its annexations of Ukrainian territory and all said they will never view Russia’s sovereignty over the regions it claimed as legitimate.

10. In Response to Russia’s annexation of further territory in Ukraine, the Biden administration announced a new round of sanctions on hundreds of Russian officials, including shell companies that had been formed in an attempt to evade previous sanctions on Russian military suppliers. The new sanctions also expand on previous sanctions against top Kremlin officials to now include their wives and children. Discussing Russia’s recent annexation claims, Biden said “Make no mistake: these actions have no legitimacy. I urge all members of the international community to reject Russia’s illegal attempts at annexation and to stand with the people of Ukraine for as long as it takes.”

11. Kim Jong Un attempted to put North Korea back into the spotlight this week, by conducting three launches of its ballistic missiles. Vice President Kamala Harris was visiting Seoul South Korea this week and criticized Kim Jong Un’s regime for its illegal arms program and human rights violations. Harris said, “In the North, we see a brutal dictatorship, rampant human rights violations, and an unlawful weapons program that threatens peace and stability.” Shortly after Harris departed North Korea launched two more ballistic missiles to the north of its Capital, in the direction of her flight.

12. Oil prices finally looked as if they were going to push their way to their first weekly gain in the last five as the U.S. dollar weakened slightly, the path of hurricane Ian failed to trigger the closure of oil platforms in the Gulf of Mexico, and it appeared that OPEC+ may be likely to agree to cut output of crude oil when it meets on October 5. Brent crude futures settled at $88.20 per barrel while West Texas Intermediate, the U.S. benchmark for oil, settled at $80.72 per barrel.

13. The euro spent the first part of the week trading basically sideways against the U.S. dollar, still below parity. The euro drifted slightly lower through Tuesday, touching its lows for the week Wednesday morning at just over 0.95. The euro began an upward climb later on Wednesday but had resumed its downward slide by evening. The euro turned upward again Thursday and kept its upward momentum going through Friday when it almost regained parity with the U.S. dollar. The euro slid lower after touching its highs on Friday but will still close out the week slightly higher, though still less worth than 1 U.S. dollar.

14. The Japanese yen spent much of the week in a declining trend against the U.S. dollar. The yen seesawed its way lower through Monday, struggled higher through mid-day Tuesday, but lost momentum and hit its lows for the week in the late hours of Tuesday evening. The yen spent the rest of the week bouncing back and forth in a very narrow trading range that saw it close out the week near its lows against the U.S. dollar.

Market volatility remains extreme, particularly equity markets, which closed out the third quarter with one of their worst monthly performances in years. It was the worst performance for the Dow Jones Industrial Average since 2002, and the worst for the S&P since 2008. Geopolitics continues to be one of the primary drivers of market volatility as well as global inflationary pressures. The economic uncertainty resulting from the aggressive steps being taken by the world’s central banks as they try to combat inflation is a secondary factor. Fear is growing among many analysts that the U.S. Federal Reserve and the rest of the world’s central banks may make a drastic error as they all try to engineer the proverbial economic “soft-landing” they desire. Economists seem to be less sure that the Fed and its counterparts can engineer a reversal in inflation without taking their respective economies deep into recession.

Russia carried through on its threat to annex the partially occupied sectors of Ukraine where it had installed proxy government officials. The referendums were completed over the weekend and are almost universally regarded as a sham and nothing more than an outright land-grab by Russia. President Vladimir Putin continues to make threats that Russia will use “any means necessary” including tactical nuclear weapons to “defend its territory and its citizens” and will likely try to use the bogus annexation of Ukrainian territories as leverage against the Western allies that have continued to back Ukraine against Russia’s unprovoked invasion. NATO blasted Russia for its actions and declared the annexations illegal. The U.S. issued further sanctions on Russian officials, their families, and additional Russian companies.

As geopolitical, economic, and environmental uncertainty escalate, equity markets continue to show signs of fracturing. In the U.S., Hurricane Ian wrought devastation across multiple states, making landfall in South Florida where storm surge and steady high winds created a swath of destruction that is hundreds of miles wide across most of the state. The storm then went on to restrengthen in the Atlantic and come ashore a second time near Myrtle Beach, South Carolina, where storm surge once again inundated the area. The economic cost to the affected states will take weeks and months to determine, and the impact to the U.S. economy overall won’t likely be known for years. Individuals and businesses alike are displaced, likely for many months, as the structures in which they resided experienced total losses in some areas. As investors witness these events, and the increasing decline in equity markets, more and more are taking steps to ensure that their portfolios are sufficiently diversified to survive downturns in other market sectors. In search of underpriced alternative assets to aid in their diversification goals, some investors have continued to use temporary price dips as buying opportunities to add additional physical precious metals to their portfolios. These same investors watched this week as precious metals prices held up, with most closing out the month with gains, while stocks closed out their worst month (and quarter) in years. 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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