The Precious Metals Week in Review – November 11th, 2022

1. We start the week with news that European Union countries are close to agreeing on a watered-down version of new capital rules for banks after the industry warned that a strict approach would risk choking off the supply of credit to the bloc’s economies. The most recent draft proposal for implementing Basel III includes several changes to an earlier version and could be approved Tuesday by the finance ministers meeting in Brussels. Banks would dodge an increase in the perceived riskiness of several types of equity exposures, fewer subordinated debt holdings would be moved to a higher risk-weighting and there would be more flexibility for property loans. Global regulators spent a decade after the financial crisis producing new rules to force banks to boost their capital reserves to avoid a repeat of the 2008 credit crunch and the ensuing bailouts by taxpayers. Yet Europe, where companies rely more on banks for funding than bond or stock markets, has been reluctant to fully implement the standards its regulators agreed to in Basel. The latest EU plan cites the “utmost importance” of implementing outstanding pieces of regulation, but it also states the need to avoid a “significant increase in overall capital requirements” for Europe’s banking system and take account of “specificities of the EU economy.”

2. Stocks edged higher Tuesday morning as investors await the outcome of the midterm elections in the U.S. The S&P 500 inched higher by 0.1%, while the Dow Jones Industrial Average ticked higher by 0.3%. The technology-heavy Nasdaq Composite rose by 0.2% in early morning trading. Later in the week U.S. and European stocks rallied as the euphoria over falling inflation in the world’s largest economy extended into a second day and China relaxed some Covid restrictions. Precious metals prices are sharply up, with gold hitting a four-week high and trading back above $1,700.00 on trading Tuesday. Silver hit a more-than-four-month high today. The precious metals are benefiting from heavy short covering in the futures markets, perceived bargain hunting in the cash markets, and even some safe-haven demand as cryptocurrency markets are selling off. Gold prices have risen 62% of the time over the six months following midterm U.S. elections, with a median return of 2%, according to a World Gold Council report going back to 1970. Investors are focused on Tuesday’s midterm elections that will decide control of the House and Senate for the rest of President Joe Biden’s first term. Historically, Wall Street has preferred a split Congress or White House.

3. Cryptocurrencies extended declines as Binance’s potential takeover of embattled rival exchange FTX highlighted how strains in the digital-asset industry are now buffeting some of its top players. The saga began unfolding Sunday when Binance Holdings Chief Executive Officer Changpeng “CZ” Zhao cast doubt in a tweet on the strength of 30-year-old Bankman-Fried’s crypto empire. Zhao said Binance would sell all its $529 million holdings in a token native to Bankman-Fried’s ecosystem. Bitcoin, the largest token by market value, fell as much as 7.7% on Wednesday after an 11% decline a day earlier. It was trading at about $17,430 as of 8:14 a.m. Tuesday’s low was the least since November 2020. Just about every digital coin was struggling. The sense of dread that swept across clients of fallen crypto exchange FTX was so intense that they pulled out $430 million worth of Bitcoin in the space of just four days. FTX had more than 20,000 Bitcoins going into Sunday, according to data from CryptoQuant. That fell to almost zero by Wednesday after fears about FTX financial health led customers to flee. FTT, the utility token of the FTX exchange, has collapsed by more than 75% in the past 24 hours and was trading around $4.20. The FTX-Binance ordeal gave some traders flashbacks to the issues suffered by Celsius, the crypto lender that collapsed earlier this year, as well as those seen by other firms that were engulfed in this year’s crash in digital assets. [UPDATE] Zhao has walked away from his bailout for Sam Bankman-Fried’s FTX almost as quickly as he offered a rescue. “Our hope was to be able to support FTX’s customers to provide liquidity, but the issues are beyond our control or ability to help,” he said in a statement. On top of that, U.S. regulators are circling, investigating whether the firm properly managed customer funds, as well as its relationship with other parts of Bankman-Fried’s crypto empire. His about-face leaves the fate of the beleaguered exchange and its clients uncertain and sparked renewed concerns about contagion risks across the crypto industry.

4. The former New York Fed President Bill Dudley said the Federal Reserve “hasn’t accomplished anything” in loosening the U.S. labor market even after four consecutive 75-basis-point hikes. Friday’s jobs report showed a 261,000 gain in payrolls and a slight uptick in unemployment in October and is “not consistent with a loosening labor market,” Dudley said at a conference on Monday. “There’s a lot of work to do, and unfortunately it’s going to put a lot of pain on the rest of the world because as the Fed tightens, the dollar appreciates, that puts more pressure on other emerging-market economies, especially those that have taken on a lot of dollar debt.” The dollar pain already has been clear as currencies across the emerging and developed world take a beating, putting pressure on central bankers to hike or intervene in markets; or both. At the same time, growth and debt risks have set many economies on a different policy course. By contrast, the UK, Australia, and Canada are already pulling back or indicating they won’t be as aggressive in coming months amid concern following the Fed could plunge their economies into recessions. Dudley said, “the Fed’s reaction to all this is, ‘Really very sorry that we’re causing all the pain for you, but we have to take care of our core problem, which is U.S. inflation, getting it back down to 2%.” What Fed Chairman Jerome Powell wants is “to take enough medicine today so that inflation expectations don’t become unanchored, so he doesn’t have to do something really, really harsh later.” This year’s Fed-driven surge of the dollar is already wreaking havoc among heavily indebted developing countries and advanced nations dependent on energy and other imports priced in the U.S. currency.

5. Once again, the bean counters at the Bureau of Labor Statistics (BLS) made the economy look better than reality. According to the BLS, and as we reported last week, the economy added 261,000 jobs in October. This was significantly higher than the 200,000 that was expected. The investing world was ecstatic to see this and bought stocks hand over fist on Friday. The only problem with this is that none of those “jobs” were real. As Bill King notes in the King Report, the BLS tweaked its seasonal adjustments in 2022 to boost the NFP numbers. In 2021, for October, the BLS reduced the total number of jobs in America from 149.31 million jobs to 148.005 million jobs. That’s an adjustment of -1.305 million. For some reason, this year (2022) the BLS only adjusted the total number of jobs by -1.061 million. That’s a difference of +244,000 from the 2021 adjustment. So, right off the bat, it looks like 244,000 of the 261,000 jobs the economy created in October of 2022 were imaginary, created via a seasonal adjustment in a spreadsheet by the BLS. The reality is that stripped of gimmicks, the economy lost more jobs than it created in October.

6. Speaking of job numbers, a report released by the Labor Department on Thursday showed a modest increase in first-time claims for U.S. unemployment benefits in the week ended November 5th. The Labor Department said initial jobless claims crept up to 225,000, an increase of 7,000 from the previous week’s revised level of 218,000. Economists had expected jobless claims to inch up to 220,000 from the 217,000 originally reported for the previous month. Meanwhile, the report said the less volatile four-week moving average edged down to 218,750, a decrease of 250 from the previous week’s revised average of 219,000. The four-week moving average of continuing claims rose to 1,450,250, an increase of 32,250 from the previous week’s revised average of 1,418,000.

7. Billions of dollars in capital calls threaten to wreak havoc on global stocks and bonds as capital calls outweigh distributions for private markets funds. As financial conditions tighten around the world, private-market funds are demanding that investors put up more of the cash they pledged during the easy-money days of the pandemic. While many big pensions and endowments are expected to have sufficient cash flows to meet these capital calls, the fear is that many other investors will have to offload liquid assets to meet the obligations. That would likely mean even deeper losses in public markets for equities and debt, where returns are already down more than 20% this year. Early signs of trouble are seen in the shrinking distributions that these private-market partnerships are delivering to investors. Five of the six private-market fund categories tracked by the Burgiss Group registered negative net commitments in the third quarter, meaning investors were required to pour more money into them than came back as returns. Buyout funds saw the largest gap, at minus $7.66 billion, the most since the second quarter of 2020. Three of the fund types distributed the lowest amount of money to investors in at least seven years. But capital calls are not the only problem for investors in private markets. Even their successes are creating headaches. As many alternative assets outperformed public markets in recent years, institutions have broken past fixed limits on the proportion of their portfolios that can be allocated to private markets. Which in turn does have the potential to trigger increased selling at a time when it is least wanted. And the sums involved could be huge. A significant amount of the easy money pumped into the financial system by central banks during the pandemic found its way into unlisted assets, which grew to $10 trillion globally by September 2021, a fivefold increase from 2007.

8. U.S. workers are having a harder time switching jobs than they expected. That’s the takeaway from a new Harris Poll study that examined job seekers’ recent experiences with the labor market. More than 70% of those looking for a new role said it was more difficult than they had expected. As the Federal Reserve raises interest rates to try to combat inflation, the US economy is showing mixed signals. Businesses reported strong hiring and wage increases last month (but allegedly few of those jobs were real- see above), but unemployment is ticking higher. For those on the ground, the current economic conditions are surprisingly challenging, a big change from this time last year when workers had all the leverage. More than a third of employed Americans are looking to change roles, according to the Harris Poll. Yet about 72% of job seekers say that companies are acting like they don’t want to hire anyone, since they’re said to be ignoring applications and not scheduling interviews. About two-thirds of those looking for a new job say they regret not starting the search sooner. A similar percentage think it would have been easier to change roles a year or two ago. The process has been long and daunting for many. More than six in 10 say they’ve searched for a new job for over six months, and nearly half report applying for more than 50 positions.

9. The price of Brent crude ended the week at $98.75 after closing the previous week at $95.77. The price of WTI (West Texas Intermediate) ended the week at $92.61 after closing the previous week at $87.90. Even with the upward price movement, the price of Brent crude did not break through the upper resistance level of $98.00. Additionally, the price of Brent crude remained below the 200-day moving average. There are still uncertainties pertaining to oil supply, including the pending price cap on Russia’s oil-related exports. The cap is planned to take effect on December 5 with respect to seaborne oil shipments and on February 5 with respect to oil products.

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 EUR/USD forex pair broke above the ascending channel and now contends with a prior level of resistance around the 1.0280 level. This is after soaring past the 1.0100 level of resistance that had proven a challenge in recent weeks. It’s not unusual to see a pullback after such an advance but price action shows a continuation in the bullish momentum which highlights 1.0340 as the next level of resistance. In the event, 1.0280 proves too much of a challenge, a pullback towards the upper side of the channel or even back to that crucial 1.01000 level remains a possibility.

11. Thursday’s change in U.S. rate expectations sent USD/JPY tumbling with the pair within a few pips of testing 140, a level that was last seen in late September. The combination of a strong dollar and a weak Yen has seen the pair rally by 40 big figures since late September last year. The Bank of Japan which has been sitting on the sidelines watching the move for most of this time, apart from a couple of recent interventions, will be happy to see USD/JPY fall. The immediate target is 139.40 to 140.00, while any move higher will likely struggle to find any traction.

Job cuts in the technology industry are accelerating, nearing levels seen in the early stages of the Covid-19 pandemic, as companies both large and small brace for tough times ahead. In recent weeks, a cluster of tech companies has said they will pause hiring or cut jobs outright in the face of sluggish consumer spending, spiraling inflation, and a strong dollar undercutting sales overseas. Leaders in the industry, a major driver of the global economy for the last decade, sense that they’re in a higher-risk environment, making them less willing to spend to grow their businesses like in years past. Meta Platforms Inc., the owner of Facebook and Instagram, is poised to cut thousands of workers this week. On Wednesday that number was confirmed to be 11,000 jobs. That follows Elon Musk’s decision to halve Twitter’s staff last week after buying the social network. Apple, Amazon, and Alphabet have all slowed or paused hiring. With tech executives growing more pessimistic about the economy, the industry shed 9,587 jobs in October, the highest monthly total since November 2020. The second quarter of 2020 still ranks as the worst three-month period for layoffs since the Covid-19 pandemic began, but this year is shaping up to be grimmer for job cuts than 2020 overall. A site that tracks cuts at startups said more than 104,000 startup workers have lost their jobs so far this year, surpassing the roughly 81,000 posts shed in 2020, which it defines as any firm formed after the dot-com bubble. In recent earnings reports, Alphabet, Amazon, Meta, Microsoft, and others fell short of projections, sending shares plunging and shaving hundreds of millions to billions of dollars from their market valuations. Meta, for instance, has lost more than 71% of its value so far this year, with investors uncomfortable with Mark Zuckerberg’s investments in an immersive digital world called the metaverse. To be sure, the scale of layoffs still is a far cry from the cuts made after the dot-com bubble burst. In 2001, the tech industry shed 168,395 jobs, followed by another 131,294 posts lost in 2002.

It appears that Europe’s energy crunch will trigger years of shortages and blackouts as it looks to replace Russian gas. Europe is buying up fuel that used to go to developing countries. The bills will be high, but Europe will survive the winter: It’s now bought enough oil and gas to get through the heating seasons. However, much deeper costs will be felt by the world’s poorest countries, which have been shut out of the natural gas market by Europe’s sudden emergency demand. It’s left emerging market countries unable to meet today’s needs or tomorrow’s, and the most likely consequences, are factory shutdowns, more frequent longer-lasting power shortages, and the incitement of social unrest. “Energy security concerns in Europe are driving energy poverty in the emerging world,” said Saul Kavonic, an energy analyst at Credit Suisse Group AG. “Europe is sucking gas away from other countries whatever the cost.” After a summer of rolling blackouts and political turmoil, cooler weather and heavy rains have alleviated the immediate energy crisis in Pakistan, India, Bangladesh, and the Philippines. But any relief promises to be temporary. Colder temperatures are on the way, and parts of South Asia can be more bitter than London. The chances of securing long-term supplies are slim. The strong U.S. dollar has only complicated the situation, forcing nations to choose between buying fuel or making debt payments. Under the circumstances, global fuel suppliers are increasingly wary of selling to countries that could be heading for default. At the same time, Europe is speeding up the construction of floating import terminals to bring in more fuel in the future. Germany, Italy, and Finland have secured the plants. The Netherlands started importing fuel from new floating terminals in September. European demand for natural gas is expected to surge by nearly 60% through 2026.

Russian inflation slowed to the lowest level since President Vladimir Putin’s invasion of Ukraine, though risks are on the rise after the Kremlin’s call-up of reservists to fight in the war. Data on Wednesday showed annual inflation slowed to 12.6% in October, a slightly larger decline than forecast by economists. It decelerated for a sixth month from a peak of almost 18% in April. The mobilization, alongside an even bigger flight of men abroad, is unsettling already weak consumer demand by prompting households to put off spending. But the enlistment of 300,000 reservists to join the fight will likely add to workforce shortages and push up wages. Although inflation galloped at the fastest pace in 20 years following the invasion, an emergency rate hike and massive gains in the ruble managed to put a brake on consumer prices. A crash in consumer spending, combined with a seasonal drop in the cost of fruit and vegetables, has kept monthly inflation negative or just around zero since May. The call-up, originally announced in late September, poses a threat to prices that Russia’s central bank highlighted at the end of last month as it held interest rates for the first time since the immediate aftermath of the attack on Ukraine. “The partial mobilization is leading to disinflation,” said Locko Bank economist Dmitry Polevoy. “Everyone is now tightening spending.” The central bank has warned that beyond the coming months, the mobilization “will be pro-inflationary as it adds to supply-side restrictions in the broader economy.”

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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