The Precious Metals Week in Review – December 16th, 2022

1. U.S. stocks edged higher Monday morning ahead of a busy week for investors, with key inflation data and the Fed’s last policy meeting of the year serving as highlights. All three major indexes ended with losses during Friday’s trading session, capping the worst week for stocks since September. The S&P 500 dropped 3.4% while the Dow fell 2.8%. The tech-heavy Nasdaq fell 4% for that week. Yields on government bonds also slightly dipped, with the yield on the benchmark 10-year U.S. Treasury note at around 3.523% early Monday, off a couple of basis points from Friday’s settlement. Wall Street geared up for a busy week, as consumer-price data out Tuesday is expected to help inform the expected trajectory of interest rates over the coming months. “We may have these higher interest rates go a bit higher than the market’s currently predicting,” Thomas H. Lee Partners co-CEO Scott Sperling said on Friday. “And they may sustain for longer than the market is currently predicting.” The Fed will make its next interest-rate decision Wednesday at the conclusion of a two-day policy meeting, with investors expecting a 0.5% increase in the Fed’s benchmark rate. This has now been confirmed. Investors will watch for any clues from the Fed and Chair Jerome Powell to the path of interest rates moving forward. On Thursday we saw U.S. equity-index futures and European stocks decline after the Federal Reserve rebuffed expectations for a dovish tilt and said interest rates will go higher for longer.

2. The path of U.S. inflation in 2023 may have more surprises in store after a year in which consumers suffered the biggest cost-of-living hit in 40 years, spurring steep interest-rate hikes by the Federal Reserve and spooking investors. The November consumer price index due Tuesday, the final report of 2022, is projected to show that while inflation is moderating, it’s running at about three times its pre-pandemic pace. Excluding food and energy, the CPI is seen rising 0.3% for a second month, with year-over-year CPI falling from 7.7% to 7.3%. U.S. consumer prices posted the smallest monthly gain in more than a year, indicating the worst of inflation has likely passed and sparking hopes the central bank will ease the pace of its interest rate rises. The key gauge rose 0.2% in November, below economists’ forecasts. The trajectory of inflation next year will depend on whether there’s further tempering in core goods prices, when and how much rents cool, and to what extent wage growth, particularly in services, moderates. Fed Chair Jerome Powell said in a speech last month that he broke down his approach to inflation into three main categories: core goods, housing, and core services ex-housing. In the near term, economists expect to see a continuation of the pullback in prices for core goods. Commodities excluding food and energy dropped 0.4% in October after no change in the prior month. The imbalance between the supply and demand for goods has been a key driver of inflation, but improving supply chains and softer demand at home and abroad have helped to stabilize prices. But stabilization of those prices, rather than outright declines, could ultimately push monthly core readings from 0.3% back up to 0.4% around March. That potentially raises the risk that the Fed might have to go again in May unless there’s data suggesting that the economy is really rolling over.

3. In green energy news scientists in California have made a key breakthrough in nuclear fusion, a technology with the potential to transform the global energy landscape. Researchers at the U.S. Department of Energy’s Lawrence Livermore National Laboratory were able to produce a fusion reaction that generated more energy than it consumed. Fusion is the same process that powers stars and the achievement is a major milestone that shows it may eventually be possible to tame the energy of the sun to create a commercial power plant on Earth. Though that is still many years away, the technology offers the promise of abundant carbon-free electricity. In the experiment, lasers were used to bombard hydrogen isotopes held in a superheated plasma state to fuse them into helium, releasing neutron and carbon-free energy. The breakthrough “could be a game changer for the world,” said Representative Ted Lieu, a California Democrat. The technology has drawn billions in investments from backers including Jeff Bezos, Bill Gates, and Peter Thiel. In recent years, it also started to win support from sovereign wealth funds, national development banks, and venture capitalists, a sign that the industry is starting to look more seriously at the concept. Atomic power will certainly play an important niche role in the world’s power grids. Fusion’s potential market share would also be challenged by solar and wind power, both of which are cheaper and have mature supply chains. Their main drawback, intermittent generation, is being somewhat addressed by a rapidly growing battery storage industry. Still, if fusion can be scaled up, it offers the promise of around-the-clock clean power with less risk and hazardous waste than fission. The technology is different from fission, which is now widely used in commercial nuclear power plants, due to fission creates energy by splitting atoms and producing radioactive waste. Fission has been commercially available for decades and still produces only 10% of the world’s power, far less than coal and gas.

4. Europe has been gripped by sub-zero temperatures in recent days, sending U.K. electricity prices to record levels and testing the limit of some countries’ power supplies. The U.K. is braced for a short-term crunch on Monday evening as freezing temperatures drive demand higher just as low wind reduces supplies. Earlier, National Grid asked for two coal units to be kept in a reserve to be ready to generate this evening if needed. It later canceled this request. Great Britain was burning gas to produce more than half of its power on Monday morning as low wind shrunk the amount it could generate from renewables. Gas accounted for 58% of power generation, with nuclear at 14% and imports at about 9%, according to the National Grid ESO. Wind, which usually saves the U.K. from burning a lot of expensive gas, was meeting just 4% of demand. The International Energy Agency warned that next year could be “an even sterner test” as Europe will have to refill gas reserves with little or no supplies from Russia. The EU will have a gas shortage of up to 30 billion cubic meters in 2023 assuming Russian supplies are halted, and Chinese demand picks up, according to Commission President Ursula von der Leyen. The bloc will need to speed up the rollout of renewables and boost measures targeting energy efficiency while rolling out its joint gas purchases to stop member states from outbidding each other. Von der Leyen also called on countries to sign off on emergency measures, including a proposal for a gas price cap. Energy ministers are aiming to reach an agreement tomorrow, but divisions over the implementation of the cap remain. “Every day of delay comes with a price tag,” von der Leyen said. We need an agreement on legislation proposed Oct 18 and we need it now.”

5. By the end of November, India had imported 8,000 tons of silver – up substantially on the 4,500 tons taken in during the entirety of 2021. The forecast for 2022 was for India to import 5,900 tons, so those predictions have been left in the dust. Traditionally, India’s precious metal dealers have received their gold shipments by air, but their silver normally came by sea. That made sense due to the relative values per ounce of the two metals, however, such is the demand for silver in 2022 that this metal is now being sent to India by air cargo. The urgent need to find stocks of silver now is partly explained by the fact that demand was down last year due to Covid restrictions. But that factor is being superseded by reports that new investment demand is flourishing, especially among the poorer Indians. The surge in imports has been partly linked to the increased industrial market, but jewelry offtake is the main consumer of silver in India. After the U.S. and Germany, India is the world’s third-largest consumer of silver. It has been described as ‘poor man’s gold’, due to the fact vast numbers of people in the country see gold and silver as vital stores of value, but many, particularly in rural India, cannot afford the amount of gold they want in the form of jewelry. So silver is their alternative choice. In addition, Indian millennials, middle class or poor, seemingly favor cheaper silver and are not as interested in gold as the older generations. London vaults had by the end of September seen huge outflows of the metal. These diminishing vault stock levels do not appear to be linked to increased demand in the West. Silver ETF (Exchange Traded Fund) demand has been somewhat sidelined, yet there have been substantial withdrawals of physical silver from both the Comex and London vaults. Estimates are that those vaults have seen silver outflows totaling 400 million ounces (11,340 tons) so far this year.

6. Applications to buy U.S. homes resumed an upward trend last week as borrowing costs steadied near an almost three-month low. The Mortgage Bankers Association’s purchase index climbed 4% in the week ended Dec. 9, according to data released Wednesday. The measure has increased in five of the last six weeks as mortgage rates declined. The contract rate on a 30-year fixed mortgage ticked up 1 basis point to 6.42% last week but is down since reaching a more than a two-decade high of 7.16% in late October. After deteriorating for much of this year, the housing market may stabilize as mortgage rates retreat. The Federal Reserve is projected to step down its pace of interest-rate hikes to half a percentage point later Wednesday, and cooler inflation data, if sustained, may call for a pause in the hiking cycle early next year. MBA’s overall measure of mortgage applications, which includes refinancing, climbed 3.2%, the most since mid-September. The index of refinancing activity also advanced. The data covers more than 75% of all retail residential mortgage applications in the U.S. Assuming further moderation in inflation ahead, the November report “provides more confidence that the Fed may only need to tap the brakes lightly in the new year to cap this tightening cycle,” Sal Guatieri, senior economist at BMO Capital Markets, said in a note. “If so, it will go some ways to increasing the odds of a soft landing.” In other words, cooling inflation without triggering a recession.

7. In the week ending December 10, the advance figure for seasonally adjusted initial claims was 211,000, a decrease of 20,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 230,000 to 231,000. The 4-week moving average was 227,250, a decrease of 3,000 from the previous week’s revised average. The previous week’s average was revised up by 250 from 230,000 to 230,250.

8. Oil rose for a third day ahead of the U.S. Federal Reserve’s monetary policy decision while the IEA cautioned that prices could rally next year amid a tightening market. West Texas Intermediate futures climbed 0.9% to above $76 a barrel. Prices may increase next year as sanctions squeeze Russian supplies and demand beats earlier forecasts, the International Energy Agency said in a report. Recent data are already showing consumption has been stronger than expected, the agency said. Still, crude is still on track for its first back-to-back quarterly decline since 2019 on concerns about the global economy.

9. The Euro fell to $1.06 on Thursday as investors digested the last ECB monetary policy decision. The central bank lifted interest rates by 50bps as expected, reiterated more hikes will follow and outlined plans for quantitative tightening. The common currency initially strengthened after the decision and hit a six-month high of $1.07 but gave up early gains in the afternoon as market participants tried to assess how much additional rate hikes will hurt an already fragile economy.

10. The Japanese yen held above 137 per dollar for most of the week, facing renewed pressure after the U.S. Federal Reserve offered a more hawkish outlook on its policy than markets predicted. The central bank is setting itself up for an uphill battle going forward. All you must do is compare the central bank’s projections for interest rates to what the market is pricing in. The median FOMC projection for interest rates using the dot plot is 5.125%, 4.125% and 3.125% for 2023, 2024 and 2025, respectively. Put another way, traders seem to be pricing in a hard landing while the Fed seems to be sticking to the soft landing. In the end, only one side will be right, and that is a recipe for volatility down the road.

Higher prices are hitting shoppers hard as 2022 comes to a close. The gift that no one wants but everyone is getting this year? Inflation. That’s taking the joy out of gift-giving for many Americans, according to a new survey from the Harris Poll. Inflation surged to a 40-year high this year, while wages struggled to keep up. Americans are cutting back on their holiday spending as a result. About 60% of respondents said they plan to buy fewer gifts and purchase gifts for fewer people. A similar percentage are cutting back on holiday travel. Meanwhile, more than one-third have decided to skip gift-giving altogether due to the costs. That’s leading Americans to lower their expectations of what they’ll unwrap. Three in 10 say they expect to be disappointed by the gifts they receive this year, with millennials and Gen Z especially pessimistic. Among those still planning to buy presents, 70% are using debit cards or cash to fund their purchases, while 60% are using credit cards, 29% are dipping into their savings accounts and 22% are turning to buy now, pay later services.

U.S. retail sales fell in November by the most in nearly a year, reflecting softness in a range of categories that suggest some easing in Americans’ demand for merchandise. The value of overall retail purchases dropped 0.6% last month after rising 1.3% in October, Commerce Department data showed Thursday. Excluding gasoline and autos, retail sales were down 0.2%. The figures aren’t adjusted for inflation. The median estimate in a survey of economists called for a 0.2% decline in total retail sales. Nine of thirteen retail categories fell last month, according to the report, including electronics, furniture, and building materials stores. Vehicle sales also declined, partly due to a drop in prices of used cars and trucks. The value of sales at gasoline stations was down 0.1% as pump prices fell. Sales at restaurants and bars, the only service-sector category in the report, rose 0.9% in November, the fourth-straight increase. The report suggests some loss of momentum in consumer demand for goods amid high inflation as well as what’s been a shift in preferences toward services. While rising wages and pandemic-era savings have helped support shoppers, Americans are beginning to feel the squeeze as the saving rate is near a record low and credit-card balances have surged. U.S. household debt climbed at the fastest annual pace since 2008 in the third quarter, with credit-card balances surging even as the interest rates that lenders charge to consumers hit a multi-decade high. The Fed is looking for a slowdown in consumer spending that will lower economic growth in order to help stamp out inflation. Policymakers stepped down the pace of interest-rate increases Wednesday as expected, and while inflation has been decelerating in recent months, they acknowledge that price pressures are still far too high.

The crypto industry has suffered many booms and busts in its brief lifespan, but nothing like this. Sam Bankman-Fried, currently sitting in a Bahamian jail, has been accused by the U.S. securities regulator of orchestrating a years-long fraud that diverted billions in customer funds from opaque and offshore exchange FTX to a now-bankrupt trading empire. The outrage among FTX’s roughly 1 million creditors is understandable, as is the skittishness of investors yanking money from other crypto platforms like Binance. Less understandable, however, is the narrative of victimhood emerging from crypto-friendly firms that did business with FTX as an apparently trusted counterparty. The bigger issue is these are sophisticated financial institutions whose job is to manage counterparty risk. There was too much greed and not enough fear. In an era when supposed “hedge” funds were pouring money into web3 gaming and DeFi rather than actual hedges, was it really a “black swan” event that FTX turned out to be a fraudulent bucket shop trading against its clients? If the victim card needs to be questioned, it’s not because it would shield Bankman-Fried from the full force of fraud charges, but because it is legally self-serving for those playing it. The chances of crypto markets ever progressing beyond speculative booms and busts will be slim to non-existent without more humility, transparency, and a stronger anti-fraud mindset from both regulators and participants. And we are a long way off from that.

As tensions continue to escalate and macroeconomic and geopolitical uncertainties increase, astute 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 global 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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