The Precious Metals Week in Review – November 18th, 2022

1. On Monday in Indonesia, Presidents Joe Biden and Xi Jinping shook hands to kick off the first in-person meeting between leaders from the U.S. and China since the coronavirus pandemic rocked the world. Biden said both countries have a responsibility to “prevent competition from becoming anything ever near a conflict,” and Xi said the two sides “need to find the right direction” and “elevate the relationship.” Before Biden sat face-to-face with Xi, U.S. officials played down hopes for any tangible progress. The outcome easily exceeded those low expectations. At the end of a meeting that ran about three hours, the U.S. said the two sides would resume cooperation on issues including climate change and food security, and that Biden and Xi jointly chastised the Kremlin for loose talk of nuclear war over Ukraine. “Right now, there’s some cause for very cautious optimism,” said Ja Ian Chong, a political science professor. “Both sides have stuck to what they’re saying, but there’s at least a sense that both sides don’t want to go off the brink.” Just four months ago, tensions between the U.S. and China reached the highest point in years as Nancy Pelosi flew into Taiwan, with some Chinese commentators calling on the military to “forcibly dispel” her plane. The incident underscored China’s inability to deter the U.S. on its most sensitive issue, leaving a slighted Xi to cut off military and climate talks while sending fighter jets and naval ships to effectively surround the island. In the short term, both leaders have the incentive to work together. While Xi is now China’s most powerful leader since Mao Zedong and set himself up to potentially rule for life at last month’s Communist Party congress, he’s also dealing with an economy battered by Covid Zero and a property crisis.

2. In recent weeks, gold has been caught in a perfect vice of bullish and bearish forces. On one hand, the Hawkish U.S. Fed has continued to pile relentless pressure on the precious metals market. During a recent press conference, Chairman Powell hinted at slowing down the pace of rate hikes, while also signaling that terminal rates may peak at a higher level. Following the conference, U.S. rates and the dollar surged. Importantly, the Fed again said that bringing inflation down to 2% remains a top priority, triggering a sharp fall in gold after the announcement. That said, gold surged $90.39/oz. [+5.40%] last week and continues to outperform the Dow stock index over the previous year. In any case, the Fed’s consistent message that it is willing to sacrifice growth to bring inflation under control has helped keep breakeven inflation expectations stable and pushed real rates to the highest level seen in decades. As we reported recently, Central Bank buying of gold, especially among emerging markets, just hit a record in the third quarter according to the World Gold Council. Central Banks gold purchases of 400 tons were the largest quarterly figure on record, and 300 tons were above the trend. The largest reported purchases came from Turkey, Uzbekistan, and Qatar. This furious Central Bank buying cannot be explained solely by dip-buying behavior or low-interest rates. It is particularly impressive also given persistent dollar strength through the third quarter that, all else equal, would have normally depressed non-USD purchases of gold. It also means that, even without any further gold purchases in the fourth quarter, 2022 is set to be a record year for Central Bank gold demand.

3. Problems are multiplying for the world’s biggest crypto fund as chaos engulfs the industry in the wake of FTX’s shock bankruptcy filing. The $11.4 billion Grayscale Bitcoin Trust has plunged more than 74% this year, outpacing the cryptocurrency’s 64% decline. That gap has widened dramatically over the past week, dragging the price of GBT to an unprecedented 42% discount to the value of the Bitcoin it holds. The dislocation issue is rooted in the fact that despite Grayscale’s best efforts, U.S. regulators have repeatedly denied applications to convert GBT into a physically backed exchange-traded fund, a structure that the Securities and Exchange Commission has yet to approve. In its formation as a trust, GBT can’t redeem shares to keep pace with shifting demand and worsening its net-asset value discount. “As far as GBT goes, I don’t know what stops this thing from sinking into a further discount,” said ETF analyst James Seyffart. “There’s also an argument to be made that the widening discount is reflective of a lower probability or at least a longer time frame before GBT is able to convert to an ETF.” Further, this week’s undoing of the TerraUSD algorithmic stablecoin and its sister token Luna has ramifications for cryptos. Almost $45 billion evaporated from the market caps of TerraUSD and Luna over a week. First, there’s the immediate impact, the rapid collapse of a once-popular pair of cryptocurrencies sent a ripple effect across the industry. This contributed to plummeting coin prices that wiped out billions of market value from the digital-asset market and stoked worries over the potential fragility of digital-asset ventures. Then there are the secondary effects. In addition to delivering punishing losses to individual users and investment firms, the spectacular failure of a market darling like Terra threatens to have a cooling effect on the fundraisings that have jacked up crypto startups’ valuations in recent years. Venture capitalists who have long been some of the industry’s biggest cheerleaders may not have quite the same risk tolerance now, especially those directly caught in the crossfire. “The biggest losers from all of this will be retail investors that didn’t understand the risks they were taking,” said Kyle Samani, co-founder and managing partner at crypto VC firm Multicoin Capital. About three-quarters of retail investors have lost money on Bitcoin, based on the use of crypto exchange apps, according to a BIS study.

4. On Wednesday U.S. stocks dropped after strong retail sales recast bets that policy tightening is nearing an end. The value of overall retail purchases climbed 1.3% last month after stagnating in September, Commerce Department data showed. Excluding gasoline and autos, retail sales were up 0.9%. The figures aren’t adjusted for inflation. The median estimate in a survey of economists called for a 1% increase in total retail sales. A rocket strike inside the Polish border gave investors another reason to pause a multiday stock market rally. The S&P 500 and the Nasdaq 100 fell after a report showed retail sales posted the biggest increase in eight months in October, outpacing estimates. Nine of 13 retail categories rose last month, according to the report, including firm results at auto dealers, grocery stores, and restaurants. The value of sales at gas stations climbed 4.1%, mostly reflecting higher pump prices. The data illustrates that consumers are continuing to prove largely resilient and suggests the economy got off to a good start in the fourth quarter. The market pullback comes after a hefty rally fueled by softer-than-expected U.S. inflation data that fanned expectations the Fed may be able to slow its tempo of interest-rate hikes. That may complicate the argument posed by several Federal Reserve officials pushing for a slower pace of interest-rate hikes in the coming months. But policymakers acknowledge that inflation is still far too high. That alongside news of China’s post-Covid reopening had pushed the dollar and Treasury yields lower in recent days. “The Fed’s job is not being made any easier by all of this different data,” Oksana Aronov, fixed income head of markets strategy at JPMorgan Asset Management, said on TV. “The stronger retail numbers today give them more cover to be aggressive, which is what they have consistently telegraphed.” Colin Asher, senior economist at Mizuho Bank also predicted more volatility ahead. “Inflation may have peaked but that doesn’t mean it’s coming down rapidly,” he said. “It wouldn’t surprise me if we go back into a period of softer equities.”

5. Diversion of Russia’s crude oil exports to Asia is gathering pace, with record volumes heading on tankers to the region’s ports. The need to switch is becoming more critical as a ban looms on seaborne imports into Europe, which was previously Moscow’s core export market. Two-thirds of crude loaded onto tankers at Russian ports is now heading to Asia. That compares with less than two-fifths in the weeks before Vladimir Putin ordered his troops into Ukraine in February. China and India (other BRIC members) form the backbone of the trade, with minor volumes heading to places like Sri Lanka and the United Arab Emirates. European Union sanctions, which will halt almost all seaborne crude deliveries from Russia to the bloc’s members, will come into force in just three weeks’ time. The measures will also bar European tankers from hauling Russian crude and prohibit the provision of insurance, brokerage, finance, vessel classification, and other services. The U.K. has followed the EU’s lead in banning its companies from supplying such services to ships. This move, like the EU sanctions, will come into effect on Dec. 5.

6. Coal is paying off for investors. Miners of the fossil fuel are raking in cash and paying out hefty dividends, with shares surging as the global energy crisis boosts coal prices to record highs. U.S. coal producers are projected to offer an average return of about 6% to investors over the next year, more than any other industry. It’s a notable turnaround for an industry that experienced waves of bankruptcies in recent years as power producers shift away from the dirtiest fossil fuel. The resurgence comes as Russia’s war in Ukraine underscores that the market for coal remains robust even as environmentalists, progressive politicians, and many corporations push to abandon the fuel to fight climate change. “The name of the game in coal right now is capital returns,” Lucas Pipes, an analyst with B. Riley Securities, said in an interview. Coal miners are in a unique position. The market is healthy, for now, as utilities clamor to secure enough fuel to keep the lights on. But the world is inexorably shifting to cleaner sources of power and demand for coal is expected to gradually decline during the next few decades. There’s little reason to spend money on mines to boost output but offering beefy payouts will make stocks appealing to investors and drive-up share prices.

7. U.S. producer price growth stepped down in October by more than expected in the latest sign that inflationary pressures are beginning to ease. The producer price index advanced 8% from a year ago, the smallest annual gain in more than a year. The median estimates in a survey of economists called for an 8.3% annual increase and a 0.4% rise from the prior month. Excluding the volatile food and energy components, the so-called core PPI was unchanged in October and rose 6.7% on an annual basis. The data comes on the heels of a smaller-than-expected monthly increase in the October price index, which investors and Wall Street welcomed as a sign that the fastest price increases in decades are finally starting to ebb. After peaking in March at 11.7% on an annual basis, producer price growth has moderated amid improving supply chains, softer demand, and a weakening in many commodities prices. Excluding food and energy, costs of goods declined during the month, and services prices fell for the first time since 2020. The Federal Reserve, which is watching all inflation data closely, is expected to soon slow the pace of interest rate hikes, though officials have emphasized they remain committed to taming inflation.

8. For the week ending November 12, the advance figure for seasonally adjusted initial claims was 222,000, a decrease of 4,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 225,000 to 226,000. The 4-week moving average was 221,000, an increase of 2,000 from the previous week’s revised average. The previous week’s average was revised up by 250 from 218,750 to 219,000.

9. Oil settled at the lowest price in nearly three weeks as a dollar rally and waning optimism over demand wiped out last week’s gains stemming from China’s less restrictive approach to Covid-19. WTI (West Texas Intermediate) prices fell nearly 5% on the day, to $81.76 per barrel at 11:52 am, the lowest level in more than a month. Brent crude prices fell 3% to $90.07, a drop of $2.79 since yesterday. Meanwhile, U.S. oil and gas companies are fracked fewer wells than they drilled for the first time in two years. This indicates a possible slowdown in production despite elevated prices and concerns about a global energy crunch.

10. The Euro climbed higher based on the perception that the Federal Reserve may not be as aggressive on its rate hike cycle as previously thought. Tuesday saw a soft read on US PPI that followed last week’s CPI missing estimates. The continuation of the recovery hinges on a breakout of the key 200-day SMA, today at 1.0411. Once cleared, the pair could then challenge the November top at 1.0481 (November 15). The EUR/USD has climbed above resistance this week as it moved above the upper band of the 21-day simple moving average.

11. After an explosive price-action packed last week, USD/Yen has been essentially directionless this week. Losses in USD/Yen have stalled after it hit a 10-week low of 137.70 on Tuesday. The pair is flirting with a cushion on a horizontal trendline from July, at about 139.50, including the 89-day moving average. So far, it is unclear if what is unfolding, a drop to 137.00-138.00 before setting a floor for another leg higher. That’s because it is not yet clear if this week’s pause in the slide is a forerunner to a reversal or a lag before the next leg lower. It is now at a crucial crossroads – a break above key resistance that it is now testing could mean the resumption of its well-established uptrend. On the other hand, a break below this week’s low could open the door to more losses in the short term.

Republicans won a narrow House majority that gives them the power to halt President Joe Biden’s agenda, yet their slim margin marked a letdown for a party that had counted on decisive election results. More than a week after Election Day, the party finally gained the minimum 218 seats needed to control the chamber. Despite concerns about Biden’s handling of the economy and the prospects of a recession, voters delivered a split verdict over who was to blame and how much weight to put on issues. While giving control of the House to the GOP, they kept the Senate in the hands of Democrats. For businesses, the return of Republicans to control of the House takes the possibility of corporate tax increases favored by Democrats off the table while diminishing the changes of workforce-boosting reforms to legal immigration. But markets may become turbulent in the middle of next year if Republicans carry through on threats to hold the nation’s debt ceiling hostage to force the president to accept needed spending cuts.

A six-figure income is needed just to afford the typical U.S. home as a surge in borrowing costs and high prices are squeezing buyers. Financing costs have shot up so fast in the U.S. that a typical house is now out of range for Americans earning less than $100,000. Buyers last month needed to earn $107,281 to afford the monthly mortgage payment on a median-priced home, up nearly 46% from $73,668 a year ago, according to a report from Redfin. The average U.S. hourly wage grew by about 5% over that same period, and inflation is also cutting into would-be buyers’ budgets. Home-sale prices rose 3.2% year over year during the four-week period ending November 6, the smallest increase since July 2020. The median home sale price has fallen 8.4% since reaching an all-time high in June, when the average 30-year fixed mortgage rate was over a point lower than it is now. Home prices rose half a percent during the same period last year. The Federal Reserve’s efforts to curb inflation have helped push borrowing costs above 7% for a 30-year fixed mortgage, turning homeownership into an increasingly exclusive club that’s out of reach for first-time buyers without high incomes or equity to tap. Even buyers who aren’t income-constrained are stepping back because homes in their range no longer meet their requirements. “Affordability challenges are a major reason why home sales have slowed so dramatically over the last few months,” Redfin reported. The measure of annual income needed to afford the median-priced house remained mostly unchanged for several years until the beginning of last year, when the pandemic boom pushed prices higher. From February 2020 (just before the pandemic started) to October 2022, the monthly payment for an American family buying a median-priced home increased by roughly 70%. Affordability challenges are a major reason home sales have slowed so dramatically over the last few months. While prices are still up compared to a year earlier, the growth has started to moderate. However, it was announced that mortgage rates plunged by nearly a half-percent this week, marking the largest week-over-week decline since November 1981. The sudden decrease gave price-strained homebuyers and sellers still in the market an inkling of relief, boosting activity in the otherwise sluggish market.

The technology industry is facing a fundamental overhaul with rising geopolitical tensions and dwindling investor appetite for money-losing startups, according to a panel of leading venture capital partners. “The reset has arrived,” said Jenny Lee, a managing partner at GGV Capital. The venture capitalist warned that money is harder to come by for startups and valuations have dropped 30% to 50% in some cases. She said the “wake-up” has already hit many smaller startups, though larger private companies may be able to wait out the painful market turn. The sentiment was echoed by other investors on the panel at the New Economy Forum. In recent years, startup valuations surged to record highs, but many companies have struggled to maintain those levels. “Valuation became disconnected from fundamentals,” said Bill Ford, chairman, and chief executive officer of General Atlantic. “Capital felt free.” Ford said that the mentality of founders used to be: “Use as much capital as you need to drive top-line growth.” But now “there’s a new world.” China has been particularly hard hit, especially as Xi Jinping’s administration cracked down on the private sector. China once rivaled the US for capital invested in startups, before Xi embarked on sweeping efforts to reform the practices of giants like Alibaba Group Holding Ltd. and Tencent Holdings Ltd. “I think what that’s meant for all of us is that the level of risk is higher,” Ford said, adding that investors still had to be in the China market. “It’s too big to ignore.” Still, China is among the worst performers, with a venture investment drop that is worse than the global decline and the pullback in the U.S. One bright spot in China’s venture landscape has been the semiconductor sector, which has drawn $7.9 billion in deals so far in 2022, a 24% increase compared to the same period last year. Xi has made it a national priority for China to build up its own semiconductor industry. This undertaking has been met with fresh urgency after the U.S. enacted broad measures to ban exports of chips to China and prohibit Americans from working in certain positions in its semiconductor sector. The value of venture capital deals in the country tumbled 44% to $62.1 billion through October, compared with the same period in 2021.

A record high 75% of U.S. winter wheat suffers from drought. La Niña has returned for the third consecutive winter, allowing for drier-than-average conditions across America’s crop belt. La Niña is expected to bring droughts to the US, South America, and eastern parts of Africa, while heavy rainfall in Australia, Indonesia, and other parts of Asia. Some farmers said that conditions are so dry that “fertilizer is evaporating from the soil, and plants are struggling to emerge from the ground.” The odds are stacking up that this winter’s growing season in the Midwest is going to be a bad one. The latest government data shows drought is intensifying across the western half of the U.S. Gary Millershaski, chairman of the Kansas Wheat Commission, said farmers who typically spread chemical fertilizer on their fields in the winter to allow the soil to replenish with nutrients ahead of the spring growing season are pulling back because of the fear it will just “evaporate and disappear.” Millershaski also farms wheat and corn in the southwestern part of the state. He said he’d planted about 4,000 acres of winter wheat but only expected to harvest 1,500 because of the severe drought, that’s less than half. Mark Nelson, director of commodities at the Kansas Farm Bureau, has already warned that the rate of emerged plants is already falling behind average levels for this time of year. Widespread extreme drought could devastate winter wheat crops but, more importantly, disrupt farmers from spreading critical fertilizers on fields ahead of the next growing season. This could dent harvests at the end of 2023. As a reminder, the U.N. Office of Humanitarian Affairs states, “El Nino and La Nina are naturally occurring climate patterns and humans have no direct ability to influence their onset, intensity or duration.”

It is relatively common that what should be recognized as a warning flag of major trouble is often ignored until things get so bad that it is almost impossible not to notice. 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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