The Precious Metals Week in Review – October 28th, 2022

1. This week started the second straight session we saw stocks keep rallying as Big-Tech earnings loom. Traders also consider whether the Federal Reserve would slow its pace of interest-rate hikes after assessing weak economic data that was released today. More than 80% of stocks in the S&P 500 index closed in green on Monday, led by gains in technology and health-care companies. The Nasdaq 100 also rose more than 1%. Among the Mega cap companies slated to report earnings this week are Alphabet Inc., Microsoft Corp. and Meta Platforms Inc. Earnings remain in focus in the US, with investors still on edge over whether companies that are among the key profit-growth engines for the S&P 500 can deliver profits with inflation crimping margins. Of the almost 20% of companies that have reported so far, roughly 58% posted positive surprises in both revenue and earnings per share, according to data compiled by Bloomberg. As the Fed attempts to stomp out inflation, latest earnings displaying resilience and showing few signs of recession may be making some investors uneasy on equities. Morgan Stanley’s chief cross-asset strategist Andrew Sheets said, “over the short-term, we think we can get some relief. The fact that earnings season has also been relatively strong is also helpful. But the big picture, and I don’t think this changes, is that we still view this as a bear market rally rather than the start of a larger new bull market.”

2. China stocks’ frenzied week has ended how it began: with jaw-dropping losses. Distraught over President Xi Jinping’s power grab and his recommitment to the Covid Zero strategy at the Communist Party Congress, investors rushed to exit Chinese shares, triggering an epic rout on Monday. The selloff resumed vigorously on Friday, sending an index of Chinese shares traded in Hong Kong to the lowest level since 2008. It is now the world’s worst-performing stock gauge for the year. A loss of almost 9% this week in the China Index also meant that the measure capped its worst ever five-day loss following any party congress since the gauge’s start in 1994. “I was unprepared for the depth of this selloff,” Nirgunan Tiruchelvam, head of Aletheia Capital said by phone. “A lot of investors and analysts were caught with their pants down.” The reaction was even more violent in the nation’s US-listed equities, with the Nasdaq Golden Dragon China Index tanking a record 21% intraday.

3. Treasury Secretary Janet Yellen cautioned that stresses in the global economy and markets hold the potential to disrupt the US financial system that has so far proved somewhat resilient in the face of those shocks. The world faces a “dangerous and volatile environment” for the global economy. This includes the surge in energy prices and increased volatility in financial markets. In such a situation, “financial stability risks could materialize” in the US, she said. Recent weeks have seen a major selloff in UK government bonds that forced the Bank of England into emergency purchases, and a tumble in the yen that’s prompted repeated intervention by Japan in the foreign-exchange market. Trading in Treasuries, the world’s benchmark government debt market has been robust, Yellen said, though she highlighted past episodes of stress and noted continuing work to improve its functioning. The Treasury is “very focused” on the issue, she said in answering a question. As for Treasuries, Yellen’s comments marked the second time this month that she acknowledged concerns over the functioning of the $23.7 trillion market. The market-making ability or willingness of large banks has failed in recent years to keep pace with that market’s expansion. That means reduced liquidity, which leaves Treasuries vulnerable in times of stress.

4. The Federal Reserve is losing billions as central banks around the world are paying more in interest thus wiping out profits that funded spending. Profits and losses aren’t usually thought of as a consideration for central banks, but rapidly mounting red ink at the Federal Reserve and many peers’ risks becoming more than just an accounting oddity. The bond market is enduring its worst selloff in a generation, triggered by high inflation and the aggressive interest-rate hikes that central banks are implementing. Falling bond prices, in turn, mean paper losses on the massive holdings that the Fed and others accumulated during their rescue efforts in recent years. Rate hikes also involve central banks paying out more interest on the reserves that commercial banks park with them. That’s tipped the Fed into operating losses, creating a hole that may ultimately require the Treasury Department to fill via debt sales.

5. U.S. home price growth slowed by the largest amount on record in August, decelerating faster than economists’ expectations and further cementing that the pandemic-era buying frenzy is largely over. Prices in August rose 13% over the same month a year ago, the S&P CoreLogic Index reported Tuesday. That’s down from July’s 15.6% annual gain, marking a month-over-month decline of 2.6%, the largest monthly drop in the index’s history. The earlier record was in July. The 20-city composite, which measures price growth in major metropolitan areas, posted a 13.1% annual gain, down from 16% the month prior. The figures came in lower than the consensus estimate of 14% in annualized price growth. “The forceful deceleration in U.S. housing prices that we noted a month ago continued in our report for August 2022,” Craig Lazzara, managing director at S&P DJI, said in news statement. “Further, price gains decelerated in every one of our 20 cities. These data show clearly that the growth rate of housing prices peaked in the spring of 2022 and has been declining ever since.” The softening in home prices reflects the deepening affordability challenges potential homebuyers are facing. Limited supply levels, inflation concerns and record increase in mortgage rates this year are also pushing builders to offer price reductions to bolster sales. “Price reductions are significant. The real estate markets are in a whole different place today,” said George Ratiu, senior economist and manager of economic research at Realtor.com. “For a lot of sellers, it’s obvious that the main way to attract interest is somewhat of an old fashioned one – price discounts.” On a month-over-month basis, the biggest declines were on the West Coast, with San Francisco (-4.3%), Seattle (-3.9%), and San Diego (-2.8%) leading the way. Still, home prices are still well above year-ago levels in all 20 cities, with Miami (+28.6%) taking the lead over Tampa (+28.0%) followed by Charlotte (+21.3%), Dallas (+20.2%), and Atlanta (+20.1%).

6. Goldman Sachs Group warns diesel shortages this winter are feared to push fuel prices higher as markets resist policy efforts to tame energy inflation. The US now has just 25 days of diesel supply — the lowest since 2008. Underinvestment in the nation’s fuel making ability, worsened by refinery closures and disruptions, is leading to a shortage of refined products, especially diesel. Goldman sees an “incredibly challenging” first quarter as the Group of 7 embargo on Russian products goes into effect. As a result of what it’s describing as a structural shortage of product, Goldman raised its price forecast for gasoline and diesel next year to $4.32 and $5.07 a gallon, respectively, from $3.99 and $5.34. The bank sees gasoline prices higher even as it forecasts demand falling below 2021 levels. The bank warned that many of the government’s efforts to fight higher energy prices focus on crude and have minor impact on fuels, for which consumers pay.

7. A wave of Russians fleeing President Vladimir Putin’s mobilization to fight in Ukraine is stirring up inflation in neighboring countries and possibly putting consumer prices under more pressure at home. Kazakhstan, which quickly appeared as a popular destination that Russians can enter visa-free, experienced what the central bank called a “migration shock.” The inflationary impact on Russia itself is less immediately clear as the country’s first mobilization since World War II upends household finances and prompts many to turn thrifty. Economists at the Bank of Russia also said this month that the flight of foreign companies from the Russian market since the invasion in February was creating inflationary pressures as supplies of key consumer products ran short. The shock may prove fleeting, however, as many Russians choose to move on to other countries after rushing to get out amid widespread uncertainty about the terms of the call-up in September. Kazakhstan, whose frontier with Russia is the world’s longest international land border, saw more than 200,000 people arrive since Putin’s call-up was announced, but an estimated 147,000 of them have already left. For now, the new arrivals are helping drive up rent prices and increase living costs for locals.

8. North Korea was warned on Wednesday that there would be an “unparalleled” response from the U.S., Japan and South Korea if it conducted a seventh nuclear test this year. The warning comes not only after it conducted a series of unannounced missile tests earlier this month, including a ballistic missile launched over Japan. “We agree that an unparalleled scale of response would be necessary of North Korea pushes ahead with a seventh nuclear test,” South Korean Foreign Minister reported a news conference in Tokyo Wednesday. The government officials did not go into detail as to what measures they would take to respond to North Korea if it did conduct another nuclear test. However, Washington and its allies’ responses are likely limited given China and Russia’s veto earlier this year that blocked additional U.N. Security Council sanctions on Pyongyang for the first time since 2006. U.S. Deputy Secretary of State Wendy Sherman said that “we urge North Korea to refrain from further provocations,” Sherman told reporters adding that they are “reckless and deeply destabilizing for the region. Anything that happens here, such as a North Korean nuclear test…has implications for the security of the entire world. We hope indeed that everyone on the Security Council would understand that any use of a nuclear weapon will change the world in incredible ways.”

9. Oil prices slid about 2% on Friday after top crude importer China widened its COVID-19 curbs, though the crude benchmarks were poised for a weekly gain on supply concerns and surprisingly strong economic data. Brent futures fell $1.41, or 1.5%, to $95.55 a barrel by 12:27 p.m. EDT (1627 GMT). U.S. West Texas Intermediate (WTI) crude fell $1.25, or 1.4%, to $87.83. U.S. gasoline futures dropped about 6%, while U.S. diesel futures rose about 3% to their highest since mid-June. “The market remains wary of the impending deadlines for European purchases of Russian crude before the sanctions kick in on 5 December,” ANZ Research analysts said in a note. Global oil-and-gas giants including Exxon Mobil, Chevron and Equinor posted huge third-quarter profits, benefiting from surging energy costs that have boosted inflation around the world.

10. The euro dipped back below parity versus the U.S. dollar on Thursday as traders bet the European Central Bank will slow the pace of interest rate hikes after delivering another 75-basis point hike Thursday. The euro EUR/USD, -0.27% was down 0.8% to trade at $0.999 versus the U.S. dollar after climbing back above parity for the first time since late September earlier this week. The shared currency is down around 12% against a broadly stronger U.S. dollar in 2022. The Federal Reserve has outpaced other major central banks, including the ECB, in aggressively raising interest rates and otherwise tightening monetary policy in its bid to get inflation under control.

11. The yen weakened Monday despite signs that Japan has ramped up its defense of the currency with a second likely intervention in as many sessions. The currency traded 0.8% weaker at around 149 per dollar as of 3:15 p.m. New York Time. It held steady around those levels throughout most of the US trading hours after reversing a brief surge of more than 1.4% earlier in the session. This stoked speculation that officials were supporting the currency again. On Friday, the yen soared the most against the greenback since March 2020 amid reports authorities were intervening. The sharp moves suggest officials have taken their gloves off in their battle against traders boosting yen weakness that is being fueled by the policy separation between the US and Japan. The Bank of Japan meets later this week, and its decision is likely to be another key catalyst for the embattled currency.

More Americans are falling behind on retirement savings, and inflation is making it even harder to catch up. A new survey found that 55% of respondents feel their retirement savings are behind where they need to be, up from 52% last year. Among those putting aside the same or less than they did in 2021, more than half said that rising prices are holding them back from saving more. “Even though Americans know they need to save more, inflation is a major obstacle to doing so,” said Greg McBride, chief financial analyst for Bankrate. “We know from the CPI and other inflation barometers that the lion’s share of inflation is coming from necessities like shelter, food, and energy costs. This is not discretionary spending that is really straining household budgets.” Nearly a quarter of respondents said they didn’t save anything this year or last year, while another 16% said they’re saving less than last year. Aside from inflation, respondents cited stagnant or reduced income, new expenses and the desire to keep more cash on hand as key reasons they’re not saving more. While some people are putting aside less money, others are drawing down their retirement funds. About 20% of respondents said they took money out of their retirement accounts over the past two years. Not surprisingly, 21% said they no longer feel as prepared for their next stage of life as they did two years ago.

After a record surge in housing costs and ballooning expenses for everything from food to energy, America’s renters have had enough. Rent gains are finally starting to slow in many parts of the US, cooling a years-long boom that sapped affordability from coast to coast. Landlords have little choice but to ease off big increases as demand from tenants is suddenly sinking. It’s a dramatic reversal from just months ago, when people were fighting over a limited supply of apartments, getting on waiting lists or paying multiple application fees to land one home. Now, particularly in pandemic boom markets such as Las Vegas and Phoenix, the application piles have thinned out and listings are lingering longer. Measures of US household formation have turned negative. In a US housing affordability crisis that’s only worsening as mortgage rates rise for homebuyers, any sign of a rental cool-off is welcome news. Yet it’s also the product of economic turmoil as people struggle with soaring costs of goods and services and wages that aren’t keeping up. “Rents have had a historic run-up, way beyond what fundamentals would justify,” said Susan Wachter, a real estate professor at the University of Pennsylvania’s Wharton School. “The Fed will not ease up until inflation abates, which requires rents to slow, the sooner the better and the harder the better, for quick relief.” Rents nationally increased 7.5% in September from a year earlier, above pre-pandemic levels, but down from a peak jump of nearly 18% at the start of the year. Preliminary October data show a drop-off that’s faster than the typical seasonal decline and would be the steepest in month-over-month data dating back to 2017.

New York and New England will start rationing heating oil before winter as stockpiles slump by 70% and fears rise that families will be left in the cold. New England’s regional power-grid operator is now warning millions of Americans in the Northeast of the potential for rolling blackouts this winter. Chris Herb, president of the Connecticut Energy Marketers Association, said recently that heating oil wholesalers are beginning to limit allocations for retail suppliers. The rationing measures, intended to prevent panic buying and hoarding, are in turn being imposed on consumers, limiting the amount of heating oil they can buy. Supplies are lower this year due to the same factors affecting world oil markets, including the failure to rebuild production ability following the pandemic, and disruptions from Russia’s invasion of Ukraine. Heating oil stockpiles have also been affected by a pricing structure known as ‘backwardation’, in which prompt deliveries are priced at a premium over deliveries in the future. “There’s just no incentive to store large amount of product,” Michael Ferrante, president of the Massachusetts Energy Association, said recently. Heating oil prices have also been rising rapidly, topping $4.09 a gallon in New York last week, up from $2.46 one year ago. The Energy Department estimates that families who rely on heating oil will see their heating costs soar 27 percent this winter. Part of the reason is that the Biden White House has leased fewer acres, both offshore and on federal lands, for oil and gas development than any other administration in a similar period dating back to the end of World War II, according to a Wall Street Journal analysis. Coal, oil and nuclear plants are being shut down faster than renewable-energy alternates can come online to replace them.

Although gold these days rarely circulates as currency because of government imposed restrictions, gold still retains all the features that explain why humanity in prehistory chose it to be money. Gold is natural money, or stated another way, nature’s money is gold. Another necessity of money is the enablement of sound economic calculation, which is only possible when using a consistent, unchanging unit of account to measure prices over time. Gold serves this role perfectly because it is the only element that is eternal and not subject to decay or degradation. A gram of gold today is identical to a gram of gold mined by the Romans. Gold comes closer than any central bank managed currency in achieving Milton Friedman’s k-percent rule that the quantity of currency should increase by a constant percentage rate every year, irrespective of bank credit cycles. The gold stock grows at approximately the same rate as world population and new wealth creation. It is a feature that the dollar and other national currencies do not match because their annual growth rates are not consistent, causing fluctuations in their “aboveground” stock. 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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