The Precious Metals Week in Review – December 2nd, 2022

1. Over the weekend we saw Chinese police clash with thousands protesting the country’s draconian COVID lockdowns, as unprecedented civil unrest gripped the nation. Demonstrations erupted in at least seven cities with violence breaking out between local police officers and furious protesters as videos emerged faster than censors could remove them. The largest demonstration appeared in Shanghai, home to 26 million residents. According to a witness, officers used pepper spray against protesters which was reported to be in the thousands. Meanwhile last week hundreds gathered to mourn the deaths of at least 10 people in an apartment fire where residents were sealed in their homes to try to stop the spread of COVID. This comes in the middle of China launching another mass crackdown on the virus with crippling lockdowns across the country, nearly three years after the pandemic started there. President Xi Jinping´s government faces mounting anger at its ‘zero-COVID’ policy that has shut down access to areas throughout China in an attempt to isolate every case. China said it would bolster vaccination among its senior citizens and push shots harder in places like nursing centers and make those unwilling to get inoculated provide a reason for their refusal. The government will also use big data to identify elderly people who need the vaccine. While cash incentives and insurance for “vaccine accidents” have been offered by local officials to dispel hesitancy, the central government has forbidden the use of mandates. This is at a time when other governments are easing controls and learning to live with the virus. Some protesters were shown in videos shouting for Xi to step down or for the ruling party to give up power. Protesters yelled slogans including “Xi Jinping, step down, Communist Party, step down, Unlock Xinjiang, unlock China, we do not want PCR (tests), we want freedom’ and press freedom.” The protest dubbed the “blank white paper protest” (demonstrating their lack of free speech) has continued throughout the week.

2. Stock markets are in for a wild ride next year as they don’t yet reflect the risk of a U.S. recession, according to strategists at Goldman Sachs and Deutsche Bank. The team models imply a 39% probability of a U.S. growth slowdown in the next 12 months, but risk assets are only pricing in an 11% chance. “This increases the risk of further recession scares next year,” they wrote in a note on Monday. Deutsche Bank, meanwhile, expects the S&P 500 Index to slump to 3,250 points, 19% below current levels, in the third quarter as a recession begins, before potentially rebounding in the fourth quarter. Their calls are a warning after equities rallied sharply in the past two months on bets that a peak in inflation will lead to a softening of aggressive central bank policies. The Goldman strategists said that while monetary policy should become less of a headwind next year, slowing global growth will keep stocks under pressure. Goldman’s analysis shows that equities tend to rebound once inflation has peaked if a recession is avoided. In the event of a contraction, however, they decline another 10% on average in the six to nine months after the peak. While they see U.S. recession risk as relatively low; they noted that concerns over financial stability as well as market stress indicators, such as liquidity risk and solvency risk have increased across asset classes.

3. The U.S. dollar looked unstoppable earlier this year when investors were adding to bets on inflation and rate hikes. The strong dollar spent a good part of the year beating up other currencies. From January to mid-October, the dollar rose 13 percent against the euro, 22 percent against the Japanese yen, and 6 percent against emerging market currencies. But now they’re turning against it in droves. Former bulls including JPMorgan and Morgan Stanley say the era of dollar strength is ending as cooling prices spur markets to trim bets on further Federal Reserve tightening. That may spell buying opportunities for the currencies of Europe, Japan, and emerging markets. “Markets now have a better grasp of the Fed’s trajectory,” said Kerry Craig, a strategist at JPMorgan, which oversees $2.5 trillion. “The dollar is no longer the straight, one-way but we’ve seen this year. There’s room for currencies like the euro and yen to recover.” Most have arrived at a similar conclusion: U.S. exceptionalism is waning. A longer-term downturn in the dollar has broader implications than just currency markets. It will ease the stress on European economies caused by imported inflation, dampen the price of food purchases for the poorest nations, and reduce the debt repayment burdens for governments who borrow in the U.S. currency. The dollar has dropped more than 6% from its September high. At the same time, the greenback has weakened against all of its Group-of-10 peers over the past month, sliding about 7% against the yen and New Zealand dollar.

4. Beleaguered crypto lenders are being dealt another blow from Bitcoin miners as they weather the aftermath of the FTX collapse. Miners, who raised as much as $4 billion from mining-equipment financing (when profit margins were as high as 90%), are defaulting on loans and sending hundreds of thousands of machines that served as collateral back to lenders. The liquidity crunch hitting digital-asset markets after FTX failed comes as low Bitcoin prices, soaring energy costs, and more competition weigh on crypto miners. Loans backed by computer equipment, known as rigs, had become one of the industry’s most popular financing tools. Many lenders are now likely facing substantial losses since they can’t seize any other assets besides the machines, whose value has dropped by as much as 85% since last November. Iris Energy Ltd. said this month it expected to default on $108 million of limited resource loans, which is mostly backed by mining rigs. There are likely to be more defaults. Compared to the publicly listed miners, private companies currently contribute about 75% of the computing power for the entire Bitcoin network and most of their rig-backed loans with lenders are undisclosed. More loans will likely come under stress if more private large-scale miners such as Compute North file for bankruptcy. “There hasn’t necessarily been the best due diligence on whether a miner was creditworthy or not,” said Matthew Kimmell, digital asset analyst at CoinShares. While miners tend to default when they are cash-depleted, some companies may have decided to stop paying the loans even if they still have cash on their balance sheets. The collateral can be worth less now than the remaining payments for some miners. It could be an economic decision to walk away from the financing deals. Miners are now focused on how to survive the next six months rather than if they need the lender for the next five years. Bitcoin has tumbled about 75% since reaching an all-time high in November 2021.

5. Proposals to rein in Corporate America’s profits, like the windfall tax that President Joe Biden wants to slap on oil drillers (a promise that will be all but impossible to deliver), are easy to dismiss as bluster. And yet, they’re an uncomfortable signal for corporate executives and shareholders. Record margins are blamed for the inflation surge squeezing middle-class families. But that diagnosis may be misguided as swelling margins are more transmitters of inflation than a root cause. If enough momentum builds to restore price stability by imposing curbs on corporate profits, it could become a problem for companies. The noise alone could spook investors and deepen a stock market slump that’s already wiped out $10 trillion. “Investors should be aware, excess corporate profits or, more pejoratively, price gouging, has come into the crosshairs,” Albert Edwards, the famously bearish strategist wrote in a recent note. Julian Emanuel, chief equity derivatives strategist at Evercore notes, “It’s not a coincidence that you’re seeing revenue gains basically in line with the sustained high levels of inflation.” He points to sales over the past year increasing between 7-11% per quarter, while prior periods saw growth of 3-6%. “That is almost exclusively driven by the ability to pass along costs. It’s pretty simple math.” Biden and influential Democrats in Congress are treating inflation as a problem of the microeconomy, a flawed approach, according to many economists that’s designed in part to deflect blame away from policy missteps. But the issue may end up being open to debate regardless should margins come down on their own. The U.S. Estimates for earnings growth, arguably the biggest input for the direction of equities, sit at a relatively paltry 3% for 2023 and have been contracting for months.

6. The war in Ukraine is strengthening the role of Asia and the Middle East as the world’s main providers of fuels like diesel and gasoline which are crucial to the global economy. As Europe and the U.S. seek to cut off their dependence on Russian petroleum products, they are facing a shortage of supplies at home. That’s opening opportunities for mega-refineries in places like China and Kuwait to flood the market with fuel. “By turning their back on Russian oil products, Europe and the U.S. are increasing their dependence on long-haul barrels from the Middle East and Asia,” said Eugene Lindell, head of refined products at FGE. Russia’s invasion is creating a greater disparity between the two regions after Western nations significantly cut refining capacity in recent years. This, while the other side of the world has been expanding. Western markets including the Americas and Europe shut down a net 2.4 million barrels a day of refining capacity in the last three years, while the Middle East and Asia added 2.5 million barrels. And that gap is expected to widen. About 8 million barrels a day of new refining capacity is set to come online in the next three years, with Asia adding the most and Europe the least, according to estimates by Rystad Energy. The seismic shift in the global refining industry was hastened during the pandemic when older plants were shut as global lockdowns decimated oil demand. China has since brought on larger and more sophisticated refineries to meet the nation’s growing need for oil, while the U.S. and Europe have focused on transitioning away from fossil fuels.

7. For nearly a decade, mega-cap technology leaders like Apple, Amazon, Microsoft, and Alphabet have dominated the U.S. stock market. A year ago, these four technology giants traded at an enterprise value/sales multiple, a ratio that compares the value of a company to its sales, of 7x versus 4x for the rest of the companies in the S&P 500. The difference between these names and the broad market has now narrowed to 4x compared to 2x. But those days appear to be over, according to strategists at Goldman Sachs. David Kostin, the bank’s chief U.S. equity strategist, told reporters in a call Monday that technology is less likely to outperform by a stronger size than other S&P 500 components in the coming years, adding that the revenue growth gap between companies in the sector and others is expected to be substantially smaller. “That exceptionalism of technology is arguably behind us,” Kostin said. For the 10-year period from 2010 to 2021, revenue generated by tech giants compounded annually at a rate of 18%, per Goldman’s data – a return Kostin called “extraordinary.” Apple, Microsoft, Amazon, Apple, and Meta Platforms have lost around $3 trillion in market value this year, according to data. Technology stocks, which are especially vulnerable to higher interest rates, have withstood the worst of the Fed-induced rout across U.S. equity markets in 2022. “The performance of U.S. stocks in 2022 was all about a painful valuation de-rating, but the equity story for 2023 will be about the lack of corporate earnings growth,” Goldman analysts wrote. “Put simply, zero earnings growth will drive zero appreciation in the stock market.”

8. In the week ending November 26, the advance figure for seasonally adjusted initial claims was 225,000, a decrease of 16,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 240,000 to 241,000. The 4-week moving average was 228,750, an increase of 1,750 from the previous week’s revised average. The previous week’s average was revised up by 250 from 226,750 to 227,000.

9. Prices have been supported by a weaker U.S. Dollar, tight U.S. supply, and hopes for improved fuel demand in China after COVID-19 curbs were eased in two major cities. West Texas Intermediate rose 1.2% to settle above $78 Tuesday, after trading in the $3 range. The prospect of a lower price cap on Russian oil is also lending support. European Union governments tentatively agreed on Thursday on a $60 cap on Russian sea-borne oil, an EU diplomat said. The wildcard is OPEC+, which holds a virtual meeting on Dec. 4 to discuss policy.

10. EUR/USD consolidated above the psychological 1.0500 level ahead of the NFP report. The Euro is currently trading at 6-month highs to the greenback around 1.0540 as the dollar index continues to slide. European data released yesterday did little to justify the Euros recent rally against the greenback as German retail sales missed estimates while the S&P PMI numbers from both Germany and the Euro area remain in contraction territory. This morning brought some positive news as the Euro area’s producer price inflation (PPI) slowed significantly in October beating estimates. However, the report did indicate inflationary pressures in Europe remain high coupled with a weakening economic outlook which suggests there is a need to continue raising interest rates.

11. The yen strengthened 1.1% to around 136.50 per dollar as prospects for a slower pace of Federal Reserve rate hikes triggered broad weakness in the dollar. “The dollar is losing more altitude as the market embraces a less hawkish than feared message from the Chair,” said Rodrigo Catril, strategist at National Australia Bank Ltd. in Sydney. The “big decline in 10-year Treasury yields sees the yen at the top of the leader board.” Every Asian currency except the Indonesian rupiah posted gains against the greenback over the past month.

The global economy is stuttering, and some of the world’s biggest names are already laying off thousands of employees. But there’s a glimmer of good news: This time around, workers have a better-than-usual shot at holding onto their jobs if a recession arrives. Almost three years after Covid-19 hit, companies around the world still complain that they can’t get the talent they need. They worry about labor shortages that will likely last beyond not just the pandemic, but the next downturn too. Deeper forces, such as changes in population and immigration, are shrinking the pool of workers they can hire from. All of this means that despite weakening demand for their goods and services, many businesses are looking to keep or even add staff, rather than let them go, hoarding labor that they know they’ll need once the economy starts accelerating again. What’s more, the starting point for employment is historically strong. The jobless rate in major developed economies, at 4.4% in September, is the lowest since the early 1980s, according to the Organization for Economic Cooperation and Development. This time around, white-collar industries including business services, tech, banking, and real estate, where staffing numbers are far above pre-Covid levels may be more vulnerable to job cuts. JPMorgan Chase, Bank of America, and Citigroup are all weighing plans to cut bonus pools for their investment bankers by as much as 30%. The Fed will get the latest snapshot of how much progress it is making on Friday when the government releases its payrolls report for November.

A key gauge of U.S. consumer prices posted the second-smallest increase this year while spending accelerated, offering hope that the Federal Reserve’s interest-rate hikes are cooling inflation without sparking a recession. This measure of U.S. inflation flagged by Federal Reserve Chair Jerome Powell as perhaps the “most important” guide to the outlook posted a slowdown last month, according to Commerce Department data published Thursday. Prices of services excluding housing and energy services rose 0.3% in October, the smallest increase in three months, and down from a 0.5% jump in September. “This spending category covers a wide range of services from health care and education to haircuts and hospitality. This is the largest of our three categories, constituting more than half of the core PCE index,” Powell said Wednesday. “Thus, this may be the most important category for understanding the future evolution of core inflation.” A broader gauge of inflation, the widely tracked “core” metric which includes goods, services, and housing but excludes food and energy items, advanced by 0.2%, less than the median forecast in a survey. It’s unclear, however, whether consumers will be able to maintain that momentum in 2023. With inflation still outrunning pay gains, many households are leaning on savings, stimulus checks from some state governments, and credit cards to keep spending. And there’s growing concern that restrictive monetary policy will tip the U.S. economy into recession.

The decade-long housing boom in the U.S. is over, and the market has gone eerily quiet. The housing market pulled back even more in September, with prices slipping 1.2% from a month earlier. It was the third straight decline for the seasonally adjusted measure of prices in 20 large U.S. cities. Buyers are clearing out, but so are sellers. And the real estate agents who served them during the pandemic housing frenzy now are left scrambling for listings or exiting into fallback careers as deals plunge. As home prices slide and the economy teeters on the edge of recession, inventory is staying tight, preventing values from falling faster. But the upheaval caused by soaring mortgage rates, a consequence of the Federal Reserve’s inflation-curbing campaign, has thrown the industry into turmoil with the market signaling leaner times ahead. Sellers listed 24% fewer homes in October compared with a year earlier, the fourth straight month with a drop, according to data from Zillow. At the same time, purchases sank and are now 17% below their levels in October 2019, before Covid hit. Although prices are rising year-over-year, they are slowing fast. A nationwide gauge increased 10.6% in September from a year earlier, down from a nearly 13% gain in August. With a typical home now only affordable to someone earning more than $100,000, brokers are struggling to find buyers. For the logjam to break, affordability must improve, meaning a significant drop in prices or rates. On this subject U.S. mortgage rates declined last week to the lowest level in more than two months, extending a recent plunge that is providing modest relief to a weakened housing market. The contract rate on a 30-year fixed mortgage fell 18 basis points to 6.49% in the week ended Nov. 25, the lowest since mid-September. The 30-year fixed rate has fallen 65 basis points in the last three weeks, the most over a similar period since 2008. And yet homeowners seem to be holding back for now and are hoping for a bigger decline in rates, which would make it easier to sell and cheaper to buy something else. Of the 20 large U.S. cities, Miami and Tampa, Florida, as well as Charlotte, North Carolina, posted the biggest annual price increases through September. San Francisco and Seattle had the weakest gains.

As tensions continue to escalate and macroeconomic and geopolitical uncertainties increase, savvy investors take added steps to help ensure that their portfolios are well-diversified in the event of a drastic downturn in the global economy. Such investors have continued to add physical precious metals as part of a well-diversified portfolio to help mitigate the growing geopolitical and global macroeconomic risks. These investors continue to stick to their plans to add physical precious metals to their portfolios whenever temporary price dips present themselves at a discount. 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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