The Precious Metals Week in Review – November 4th, 2022

1. On Monday stocks fell at the start of a busy week for earnings, with investors awaiting Wednesday’s Federal Reserve decision for clues on whether officials will dial back the pace of rate increases as early as December. Morgan Stanley’s Michael Wilson says the end of Fed tightening may be nearing suggesting the Fed pivot sooner rather than later. Wilson is a strategist and stock market bear who correctly predicted this year’s slump in equities. Indicators including the inversion of the yield curve between 10-year and three-month Treasuries — a recession indicator with a perfect record — “all support a Fed pivot sooner rather than later. This kind of price action isn’t unusual toward the end of the cycle particularly as the Fed moves closer to the end of its tightening campaign, something we think is approaching,” said Wilson, who was ranked the best portfolio strategist in the latest Institutional Investor survey. “Therefore, this week’s Fed meeting is critical for the rally to continue, pause or even end completely.” All eyes will be on the US central bank, which is widely expected to raise rates by 75 basis points on Wednesday for the fourth time. US stocks have rallied over the past two weeks even as Big Tech earnings disappointed. However, UBS Global Wealth Management sees it differently saying a Fed pivot is unlikely given the exceedingly high level of US inflation. “We expect the Fed to keep hiking aggressively until the official data shows inflation is receding,” UBS strategists led by Mark Haefele wrote in a note. “Even when the Fed finally does stop raising rates, it’s worth remembering that monetary policy is likely to remain at restrictive levels for some time.”

2. In technology news an equity investor in Elon Musk’s deal for Twitter, Binance Holdings Ltd., is forming a team to look at ways that blockchain and cryptocurrencies could help the social media platform. The world’s largest crypto exchange appears to be seeking an active role in how Twitter is run, after confirming that it had made an investment as part of Musk’s takeover of the platform. “Binance is creating an internal team to focus on ways that blockchain and crypto could be helpful to Twitter and actively brainstorming plans and strategies that could help Elon Musk realize his vision,” a spokesperson said in a statement, adding that the effort was in its first stages. Areas of focus could include on-chain solutions “to address some of Twitter’s issues, such as the proliferation of bot accounts in recent years.” It also could play a role in bringing social media and Web3 together to broaden the use and adoption of crypto and blockchain technology. Musk has repeatedly highlighted the prevalence of bots, or automated accounts, as a concern and even cited them when trying to scrap the deal previously.

3. According to The Silver Institute, physical silver investment demand, consisting of silver bar and bullion coin purchases, is projected to jump 13% in 2022, achieving a seven-year high. In 2021, a comprehensive report found that these three areas of growing demand for silver could lead the way, solar, 5G, and automotive. More silver is being demanded for use in solar photovoltaic (PV) cells, as countries adopt renewable energy sources. As the metal with the highest electrical and thermal conductivity, silver is ideally suited to solar panels. It is estimated about 100 million ounces of silver are consumed per year for this purpose alone. One projection has annual silver consumption by the solar industry growing 85% to about 185 million ounces within a decade, according to a report by BMO Capital Markets. The US solar industry installations grew 43% year over year in 2020. By 2030, solar installations are expected to quadruple from current levels. 5G technology is set to become another big new driver of silver demand. The Silver Institute expects silver demanded by 5G to more than double, from its current 7.5 million ounces to around 16Moz by 2025 and as much as 23Moz by 2030. This would be a 206% increase from current levels. Electric vehicles have up to twice as much silver as gas-powered ones, with autonomous vehicles requiring even more due to their complexity. It estimates the sector’s demand for silver will rise to 88Moz in five years as the transition from traditional cars and trucks to EVs accelerates. Others estimate that by 2040, electric vehicles could demand nearly half of the annual silver supply.

4. On Tuesday stocks and bonds saw their gains sputter after data showing a solid US labor market bolstered speculation that Federal Reserve policy could remain aggressively tight even with the threat of an economic recession. However, stocks then came off session lows, with traders assessing data for clues on whether the Federal Reserve will be able to decelerate its pace of monetary tightening soon to prevent a hard landing. The S&P 500 fell on an unexpected rebound in US job openings. The US job market is about the tightest it’s been in recent memory, with vacancies near an all-time high and unemployment at 3.5%—half a point below the threshold prescribed in the Humphrey-Hawkins Act. The Humphrey-Hawkins Act spells out a range of solutions to inflation that don’t involve tight monetary policy, such as the setting up of government stockpiles of essential commodities, encouragement to collective bargaining, and greater enforcement of antitrust laws to increase competition. It also states that policies for reducing inflation should be designed not to impede the achievement of the employment goal. Critics such as Gertrude Goldberg say the Fed’s approach to cooling inflation by icing demand for workers is misguided, and so is Biden’s support for it. “This is not the only way to control inflation, and it certainly isn’t the way to control supply-side inflation,” Goldberg says. “Raising interest rates puts the burden of fighting inflation on working people who aren’t really responsible for it.”

5. Mortgages rates in the US dropped after a three-week run of gains that sent borrowing costs to a two-decade high. The average for a 30-year, fixed loan fell to 6.95% after surging past 7% last week. Even with the latest decline, mortgage rates have more than doubled this year. High borrowing costs have pushed out many would-be buyers from the market, weakening demand and fueling a drop in home prices. “Mortgage rates continue to hover around seven percent, as the dynamics of a once-hot housing market have faded considerably,” said Sam Khater, Freddie Mac’s chief economist. “Unsure buyers navigating an unpredictable landscape keeps demand declining, while other potential buyers remain sidelined from an affordability standpoint.” The Federal Reserve’s campaign to further squash inflation has led it to hike its benchmark rate, even more, boosting that by another 75 basis points Wednesday. Addressing reporters after the Fed raised rates for the fourth time in a row, Powell said “incoming data since our last meeting suggests that the ultimate level of interest rates will be higher than previously expected.” Powell said it would be appropriate to slow the pace of increases “as soon as the next meeting or the one after that. No decision has been made,” he said while stressing that “we still have some ways” before rates were tight enough. It is very premature to be thinking about pausing,” he said. “Yesterday’s interest rate hike by the Federal Reserve will certainly inject additional lead into the heels of the housing market,” Khater said. This year’s climb in home-borrowing costs now means the monthly payment on a $300,000 mortgage would total nearly $1,986, $685 more than in January when the 30-year average was 3.22%. Initially, stocks rallied and Treasury yields tumbled with the dollar on the statement, which hinted rate hikes were entering their final phase. Then, as Powell talked about a higher peak rate and said the Fed had a “ways to go” on tightening, yields and the dollar surged, and stocks slipped. The S&P 500 suffered its worst rout on a Fed decision day since January 2021.

6. The world’s wealthiest 20 tech billionaires have lost a staggering half a trillion dollars in 2022 alone due to the stock market’s sharp tumble, rocketing interest rates, and record inflation. The richest tech moguls include Mark Zuckerberg, Bill Gates, and Larry Ellison, and have seen more than $480 billion of their wealth wiped away according to an index that ranks the richest people in the world. Their financial woes were further compounded by a slew of tech giants reporting disappointing earnings. Last Thursday, Zuckerberg saw his wealth drop a further $11 billion, meaning his net worth has now plummeted more than $100 billion in a little over a year. Meta reported a decline in revenue for the second consecutive quarter last week and has struggled after sinking $70 billion into its virtual world the Metaverse. Amazon’s value has dropped below $1trillion for the first time since April 2020. Apple, Microsoft, and Alphabet still boast values greater than $1trillion – but these companies have not been immune to huge declines in their stock prices. Tesla dipped below $1trillion last November, just weeks after it reached the milestone. An analysis of the former six-strong ‘Trillion Dollar Club’ by Fortune reveals all have suffered double-digit percentage declines in value since their peaks. Meta has struggled the most, dropping a staggering 77.1 percent. Amazon and Tesla have dipped by 44.5 percent and 41.8 percent, respectively. Alphabet’s market cap has fallen 38.6 percent, Microsoft’s by 32.8 percent, and Apple has lost 18.3 percent of its peak value. The falls mean $4.35 trillion has been shaved off the collective value of the companies since their peak valuations of nearly $12 trillion.

7. In the week ending October 29, the advance figure for seasonally adjusted initial claims was 217,000, a decrease of 1,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 217,000 to 218,000. The 4-week moving average was 218,750, a decrease of 500 from the previous week’s revised average.

8. Total nonfarm employment increased by 261,000 in October, and the unemployment rate rose to 3.7 percent, the US Bureau of Labor Statistics reported on Friday. Notable job gains occurred in health care, professional and technical services, and manufacturing. Hurricane Ian had no discernible effect on the national employment and unemployment date for October. The number of people not in the labor force who currently want a job was little changed at 5.7 million in October and remains above its February 2020 level of 5.0 million. These people were not counted as unemployed since they were not actively looking for work during the 4-week period.

9. Oil prices rose Friday, boosted by a weaker dollar as well as renewed hopes for a quick relaxation to China’s Zero-COVID policy, potentially lifting economic activity at the world’s largest crude importer. U.S. crude futures traded 4.5% higher at $92.11 a barrel, while the Brent contract rose 3.9% to $98.36. Crude prices have climbed to their highest levels in nearly four weeks.

10. The Euro is the 2nd most popular reserve currency in the world, behind only the US Dollar; and it is also the 2nd most traded currency in the world. The Euro remains under pressure against an overall strong US dollar and continues to leak lower. The downtrend is driven by an unbroken series of lower highs and lower lows, while recent price action has pushed the pair below all three moving averages. EUR/USD briefly revisited the mid-0.9700s soon after Nonfarm Payrolls showed the US economy added 261K jobs during October, surpassing initial estimates for a gain of 200K jobs. The September reading was revised up to 315K (from 263K).

11. The USD/Yen pair comes under some selling pressure during the early North American session and drops to a fresh daily low in the last hour. Spot prices, however, quickly recovered a few pips from sub-147.00 levels, though remain in the negative territory. This is amid the heavily offered tone surrounding the US Dollar. In fact, the USD Index retreats further from a two-week high touched the previous day in reaction to the mixed US monthly employment details, which, in turn, is seen exerting pressure on the USD/Yen pair.

Across the pond, we see how the Bank of England’s monetary policy isn’t working as intended due to the gap between securing funding while policy rates keep widening. The cost of borrowing sterling against high-quality collateral is sliding away from the Bank’s key rate. This creates a distortion that risks impeding the central bank’s ability to tighten policy effectively. The price investors pay to borrow cash overnight to counterparties is trading 43 basis points below the BOE’s rate. That’s a record discount. Normally, the two rates should move broadly in tandem as traders take their cues from changes to the policy benchmark. But investors including pension funds are hoarding cash after the bond market turmoil last month, and the flood of liquidity is keeping repo rates depressed. While the BOE is expected to deliver a 75 basis-points hike Thursday, its biggest since 1989, the risk is that the move doesn’t filter fully through to the market. For its part, the BOE says it watches market interest rates to assess the effectiveness of monetary policy application. Years of quantitative easing have limited the pool of safe government securities freely available to trade. This shortage also affects other major central banks including the European Central Bank which must also contend with this shortfall. The BOE put an end to its own bond-buying program and even sold 750 million ($860 million) worth of UK government bonds from its quantitative-easing portfolio for the first time Tuesday. The move is aimed at reversing the QE program that helped prop up the economy through the global financial crisis and the pandemic. Under the program, the BOE bought bonds in financial markets to push interest rates to near zero, hoping that easier money would give investors confidence and help foster growth. Yet demand for high-quality liquid assets still outstrips supply. The dash for the short-maturity paper was on full display Tuesday when almost 40% of total bids at a BOE auction were placed on a single sought-after security. The premium that bonds trade at compared to equivalent interest-rate swaps has surged this year across shorter maturities.

The invisible hand of the free market is not working like it used to in balancing oil supply and demand. The cure for high oil prices is high prices, or so says the commodity industry’s adage. Higher prices will simultaneously reduce demand and increase supply, eventually making the goods less expensive. This has proven true for centuries. In commodities, a bust follows every boom. Generations of petroleum engineers, geologists, and financiers have grown up swearing by it. But the principle no longer seems to be governing the oil market. To be sure, the elevated cost of crude is suppressing appetite. But the other side of the equation, supply isn’t working out. The industry simply hasn’t been reacting to higher prices with more investment as it has before. This means demand will have to do all the work to rebalance the oil market. The result is likely to be a slower economy and more sustained energy costs than in the past. But why isn’t the supply lever working? Money certainly isn’t the problem. Big Oil has reported its best-ever six-month period, earning more than $100 billion (about $310 per person in the US) in profits from April to September. Exxon Mobil just enjoyed the best quarter in its 152-year history. Neither Exxon nor its competitors have announced any major increases in spending beyond what they have already planned. Institutional investors, led by BlackRock, have convinced virtually every oil executive to keep spending under control. Pierre Breber, the chief financial officer at Chevron, put it this way: “We’re not really paid for growth by the market.” Instead, they are channeling the profits into dividends and share buybacks. And the result is Big Oil collectively is underinvesting by a lot. Last year, the industry spent $305 billion on oil exploration and production, significantly below what’s required to meet oil demand until the end of the decade. According to the International Energy Agency, the industry needs to spend nearly 50% more annually from 2022 to 2030 to meet the world’s oil needs. But let’s not kid ourselves. Oil companies are doing what they were told to do, which was to spend less on fossil fuel production. Now facing the political backlash of high oil prices, Western governments are now trying to force the industry to accelerate spending. But having seen how profitable it can be, oil executives are very reluctant to cooperate. US President Joe Biden recently threatened the industry with higher taxes unless companies agree to boost not just oil production but also oil refining. This direct plea is a 180-degree policy change from Biden’s campaign when he promised “no more drilling.” But, if Biden wants more oil, he needs to reset the conversation completely, and that means telling green campaigners and Wall Street investors, loud and clear that America needs fossil fuels right now.

Construction of solar and wind farms needed to purge planet-warming fossil fuels from the grid slowed sharply this year after trade issues, tax uncertainty and supply-chain disruptions suppressed development. About 14 gigawatts of clean power installations have been built so far this year, down 18% from the same period in 2021, according to a report released Wednesday. Figures for just the third quarter were even worse with wind installations dropping 78% and solar down 23% compared with the same quarter last year. Heading into the start of the climate summit in Egypt, the Biden administration also faces criticism for not giving more money to poorer countries experiencing the worst effects of climate change. “The industry continues to deal with policy and regulatory challenges hindering development and deployment of clean power,” JC Sandberg, ACP’s interim chief executive officer, said this week. The solar market has faced repeated delays as companies struggled to obtain panels during a complicated trade dispute, while uncertainty around tax incentives and grid interconnection delays slowed wind development, according to the ACP. This also underscores the White House’s oft-competing political priorities as it looks to combat climate change while taking a firm stance against China. Biden’s plan included invoking emergency authorities to impose a two-year ban on new tariffs for panels imported from four Southeast Asia nations. “A two-year delay is hardly clarity the industry is seeking, as they would like this issue to go away or be resolved,” Jeff Osborne, an analyst at Cowen & Co., said in a statement. “This approach allows the Biden team to appear to be responsive to repeated requests for intervention. However, the issue may still be challenged in court, and it is unclear on the potential impact of tariffs that may be announced on past shipments.” George Hershman, chief executive of SOLV Energy said, “The lingering threat of tariffs stemming from the ongoing circumvention case will continue to jeopardize our clean energy progress.” The threat of tariffs stemmed from the Commerce Department’s investigation into whether Chinese companies are circumventing decade-old duties by assembling solar cells and modules in Cambodia, Malaysia, Thailand, and Vietnam. These countries make up about 80% of annual panel imports into the US. Manufacturers in the four targeted nations had largely halted shipments to the US, stalling solar projects and prompting at least one utility to warn it would keep a coal plant operating longer than planned.

Geopolitical, economic, and environmental uncertainty can be expected to continue in the near term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. 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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