The Precious Metals Week in Review – December 23rd, 2022

1. We started off the week with U.S. stocks wavering as traders mull the Federal Reserve’s path next year after central bank officials vowed to keep raising rates until they’re confident inflation has been subdued. However, stocks did manage a rally mid-week. There was no shortage of dramatic moments that equity investors experienced in 2022. The S&P 500 faltered and the tech-heavy Nasdaq 100 fell. Treasuries dropped, with the policy-sensitive two-year yield around 4.22%. Some investors may be looking past fears of an economic recession triggered by higher interest rates, and betting instead that inflation might be peaking. This may allow the Fed and other central banks some leeway in their tightening policy. Others are still on the edge after recent remarks from the Fed and other hawkish central banks across the globe. “I’m kind of more in the camp of that they hike in February, and I do think they’ll hike again in March, but that’s probably it,” Matt Brill, head of investment grade and senior portfolio manager at Invesco, said recently. “We’re 90%-95% of the way done here. I think the floor has sort of been set and the worst is certainly behind us.” Equity investors were also heartened by a vow from China’s top leaders to boost the economy next year by reviving consumption and supporting the private sector. While news of a Covid surge across China capped Asian market gains, Beijing’s pledge lifted energy and metals prices, with those sectors leading gains on Europe’s Stoxx 600 index.

2. Investor Peter Schiff and politician Nigel Farage recently shared their thoughts on why gold is scheduled to emerge as an outperformer in 2023, and why it’s already doing what it’s supposed to. Both gold’s 50-day and 200-day moving averages show it outperforming inflation, the latter being something Farage refers to as a “disease of money caused by the government.” Perhaps due to his status as a former politician, Farage is among the few in that group willing to admit that inflation is a permanent fixture. The two are bearish on inflation, with Schiff being more so and Farage likening it to just short of the 1980s and 1990s crisis. Despite likely strength in the dollar, nations are expected to continue their de-dollarizing bids. Another interesting story will be the development of the bond market in case the Federal Reserve has to raise rates much higher to deal with inflation. In Schiff’s case, he expects government efforts in this regard to be generally fruitless and an attempt to mask something that can’t truly be dealt with. Interestingly, though both agree gold will do very well next year, they expect it to outperform the U.S. dollar, the one currency it has been lagging in so far. Schiff said that investors still have faith in the Federal Reserve’s ability, though this could change rapidly if there is any sign that inflation can’t be kept in check. Runaway inflation, despite the Fed’s efforts, would be a major driver for gold prices, should it occur next year.

3. The world’s biggest crypto exchange, Binance, is battling to shore up confidence after a surge in customer withdrawals and a steep drop in the value of its digital token. The exchange said it dealt with net outflows of around $6 billion over 72 hours last week “without breaking stride” because its finances are solid and “we take our responsibility as a custodian seriously.” After the collapse of rival exchange FTX last month, Binance’s founder Changpeng Zhao promised his company would “lead by example” in embracing transparency. Yet a Reuters analysis of Binance’s corporate filings shows that the giant exchange that has processed trades worth over $22 trillion this year, remains mostly hidden from public view. Binance declines to say where it is based. It doesn’t disclose basic financial information such as revenue, profit, and cash reserves. The company has its own crypto coin but doesn’t reveal what role it plays on its balance sheet. It allows users to deposit collateral in the form of crypto and borrow funds to leverage the value of their derivatives trades by as much as 125 times. For the user, this can lead to huge gains or huge losses. But it doesn’t detail how big those bets are, how exposed it is to that risk, or the full extent of its reserves to finance withdrawals. And as Reuters reported in October, Binance has actively avoided oversight. Binance’s huge role in the crypto market, which accounts for over half of all trading volume, has made its operations a keen topic of interest for U.S. regulators. The company is under investigation by the U.S. Justice Department for possible money-laundering and sanctions violations, and some prosecutors believe they have gathered sufficient evidence to charge Binance and some top executives. In an effort to look inside Binance’s books, filings by their units in 14 jurisdictions were reviewed where the exchange on its website says it has “regulatory licenses, registrations, authorizations and approvals.” These locations include several European Union states, Dubai, and Canada. However, a closer look at the filings shows that these units appear to have submitted scant information about their business to the authorities. The public filings do not show, for example, how much money flows between the units and the main Binance.com exchange. Former regulators and ex-Binance executives say these local businesses serve as window dress for the main unregulated exchange.

4. The Treasury Department’s top official for financial markets and stability expressed little urgency over the federal government’s need to prepare for the potential launch of a digital U.S. dollar. Regulators need to examine whether a central bank digital currency or CBDC, would actually improve the speed or cost of real-time interbank payments, which the Federal Reserve is aiming to introduce in 2023, said Nellie Liang, undersecretary for domestic finance at the Treasury. Asked whether a digital dollar would help defend the primacy of the dollar in international commerce or as a reserve currency, she was even clearer. “My view is our global leadership doesn’t come from our technology. It comes from our governance system, the rules that govern our financial markets, our rule of law, and the safety and soundness of our institutions.” If after five or more years many countries have introduced a CBDC, she added, that might become a factor in pushing the U.S. to adopt one. But she emphasized the government’s study of a potential CBDC was mainly to be prepared for a need that didn’t currently exist. “The Federal Reserve does not intend to proceed with issuance of a CBDC without clear support from the executive branch and from Congress, ideally in the form of a specific authorizing law.” Fed Chair Jerome Powell has shown no urgency to decide the matter soon.

5. King Dollar is facing a revolt. Tired of a too-strong and newly weaponized greenback, some of the world’s biggest economies are exploring ways to circumvent the U.S. currency. Smaller nations, including at least a dozen in Asia, are also experimenting with de-dollarization. And corporates around the world are selling an unprecedented part of their debt in local currencies, wary of further dollar strength. No one is saying the greenback will be dethroned anytime soon from its reign as the principal medium of exchange. Calls for “peak dollar” have many times proven premature. But not too long ago it was almost unthinkable for countries to explore payment mechanisms that bypassed the U.S. currency or the SWIFT network that underpins the global financial system. Now, the sheer strength of the dollar, its use under President Joe Biden to enforce sanctions on Russia this year and new technological innovations are together encouraging nations to start chipping away at its dominance. “This will simply intensify the efforts in Russia and China to try to manage their part of the world economy without the dollar,” said Paul Tucker, a former deputy governor of the Bank of England. John Mauldin, an investment strategist said the Biden administration made an error in weaponizing the U.S. dollar and the global payment system. “That will force non-U.S. investors and nations to diversify their holdings outside of the traditional safe haven of the U.S.” Plans are already underway in Russia and China to promote their currencies for international payments, including using blockchain technologies. The U.S. decision to use the currency as part of a more aggressive form of economic statecraft puts extra pressure on economies in Asia to choose sides. “The complicating factor in this cycle is the wave of sanctions and seizures on USD holdings,” said Taimur Baig, managing director, and chief economist at DBS Group Research in Singapore. “Given this backdrop, regional steps to reduce USD reliance are unsurprising.”

6. Russia’s seaborne crude shipments collapsed in the first full week of Group of Seven sanctions targeting Moscow’s petroleum revenues, a potential source of alarm for governments around the world seeking to avoid disruption to the nation’s giant export program. Some of the plunges were exaggerated by work at a port in the Baltic that’s now finished, but there also appeared to be a shortage of ship owners willing to carry key cargoes from an export facility in Asia. Several other ports also showed week-on-week declines. The European Union sanctions that began on Dec. 5 are designed to curb Russia’s revenue from oil. On the one hand, the bloc stopped buying but it also barred the provision of key services to enable the oil to be moved. The U.S., alarmed at the severity of the measures, pushed for the measures to be softened with the implementation of a price cap, keeping those things, especially insurance, available for buyers elsewhere in the world when traders paid $60 a barrel or less for Russian oil. But in the first full week after the EU ban on seaborne Russian crude imports came into effect, total volumes shipped from the nation dropped by 1.86 million barrels a day, or 54%, to 1.6 million. The less volatile four-week average also plunged, setting a new low for the year. The EU’s ban on imports of Russian crude by sea closed off Moscow’s closest oil market, which took roughly half the country’s supplies at the start of the year. Apart from a small volume delivered to Bulgaria, seaborne flows of Russian crude to the bloc halted in full, as planned.

7. The highest interest rates in 15 years are delaying home dreams, putting business plans on ice, and forcing many Americans to agree to loan terms that would have been unimaginable just nine months ago. Most of all, the surge in borrowing costs is punishing the cash-poor. And it’s about to get worse as the Federal Reserve continues its anti-inflation campaign and keeps hiking rates next year. “Consumers who weren’t able to make ends meet are just digging themselves a deeper and deeper hole with the higher interest rates,” said Philip Cornell, an economist at the Ludwig Institute for Shared Economic Prosperity. As the Fed’s most aggressive interest-rate hike cycle in a generation filter through the U.S. economy, the gap is widening between the haves and the have-nots. Even without a recession, households and businesses are feeling financial pain. As mortgage rates hit their highest levels since 2001 this year, real estate agents suddenly found themselves hunting for clients again, if not losing their jobs. Thousands of mortgage employees have already been laid off at lenders including Wells Fargo and JPMorgan Chase. The higher rates and a surge in home values during the pandemic pushed the monthly mortgage payment on a median-priced house to more than $2,000, up from about $1,100 just before Covid-19 hit. U.S. homebuilder sentiment fell every month in 2022, sinking in December to a level not seen in over a decade outside of the pandemic amid elevated mortgage rates and high construction costs. The National Association of Home Builders/Wells Fargo gauge dropped 2 points this month to 31, the lowest level since June 2012 excluding the onset of the Covid-19 pandemic, figures showed Monday. The uninterrupted slide this entire year is the longest stretch on record.

8. In the week ending December 17, the advance figure for seasonally adjusted initial claims was 216,000, an increase of 2,000 from the previous week’s revised level. The previous week’s level was revised up by 3,000 from 211,000 to 214,000. The 4-week moving average was 221,750, a decrease of 6,250 from the previous week’s revised average. The previous week’s average was revised up by 750 from 227,250 to 228,000.

9. Oil prices were climbing again early on Thursday morning, with both Brent and WTI more than $2 higher than they were at the start of the week. Crude oil prices were rising for the fourth day in a row today, pushed higher by colder weather in the United States in what has been described as a once-in-a-generation storm. At the time of writing, Brent crude was close to $82.42 per barrel, with West Texas Intermediate at $78.56 per barrel. Although the daily increase was a modest one of less than a percentage point, it was part of a trend that started at the beginning of the week as weather forecasts from the United States.

10. The EUR/USD pair holds comfortably above the 1.0600 round-figure mark through the early North American session and moves little in reaction to the mixed U.S. macro data. The Bureau of Economic Analysis reported that the Personal Consumption Expenditure (PCE) Price Index rose a modest 0.1% in November, missing expectations for a reading of 0.3%. The slight disappointment, however, was offset by an upward revision of the previous month’s reading to 0.4% and the higher-than-anticipated yearly rate of 5.5%.

11. The USD/JPY pair builds on the previous day’s rebound from the 131.65 area and touches a three-day high on Friday, though lacks bullish conviction. The pair manages to hold steady around mid-132.00s through the early European session as traders keenly await the U.S. Personal Consumption Expenditure (PCE) data before placing fresh directional bets. The downside, meanwhile, remains cushioned amid a recovery in the global risk sentiment, which tends to undermine the safe-haven Japanese Yen.

The Federal Reserve’s preferred inflation measures eased in November while consumer spending stagnated, suggesting the central bank’s interest-rate hikes are helping to cool both price pressures and broader demand, with more tightening on the way. The personal consumption expenditures price index excluding food and energy, which Fed Chair Jerome Powell has stressed is a more exact measure of where inflation is heading, rose 0.2% in November from a month earlier. That matched estimate, but data for the prior month were revised higher. Personal spending, adjusted for changes in prices, stalled in November, the weakest since July and below forecast. An increase in services spending, led by restaurants and accommodation, offset a decline in outlays on merchandise. Like the consumer price index figures released earlier this month, the figures point to a welcome retreat in price pressures and suggest the U.S. has passed peak inflation. While many expect to see a rapid pullback in inflation over the next year, the Fed is ultimately aiming for a 2% goal. Powell emphasized that last week when he said the central bank needs “substantially more evidence” to have confidence that inflation is on a sustained downward path.

Economists say there is a 7-in-10 likelihood that the U.S. economy will sink into a recession next year, slashing demand forecasts and trimming inflation projections in the wake of massive interest-rate hikes by the Federal Reserve. The probability of a downturn in 2023 climbed from 65% odds in November and is more than double what it was six months ago, according to the latest monthly survey of economists. The following are just a few of the recent data points that support the view that a recession is fast approaching:

• The U.S. personal savings rate is now just 2.3%. That is the lowest savings rate for consumers since records began in 1959.
• The ISM survey for November showed the U.S. manufacturing sector is now shrinking for the first time in the past 29 months. And, while the ISM Service sector index rose to 56.5 in November, the S&P Global U.S. Services PMI for that same month signaled a faster contraction in business activity with a reading of just 46.2. The fall in output was the second steepest since May of 2020, with a sharp decline in new orders.
• The BLS (Bureau of Labor Statistics)’ Establishment job survey showed 263k net new jobs were created in November. However, the Household Survey showed that 138k jobs were lost last month; and not one single job has been created in that survey since March of this year. Also, the average work week fell along with the aggregate hours worked.
• Research firm Challenger Gray and Christmas announced that planned job cuts soared by 417% in November, with the highest number of layoffs in the tech sector on record.

The median estimates see gross domestic product averaging a paltry 0.3% next year, including an annualized 0.7% decline in the second quarter and flat readings in the first and third quarters. Consumer spending, which accounts for about two-thirds of GDP, is projected to barely grow in the middle half of the year. “The U.S. economy is facing big headwinds from surging interest rates, high inflation, the end of fiscal stimulus, and weak export markets abroad,” said Bill Adams, chief economist at Comerica Bank. “Businesses have turned cautious about adding to inventories and hiring and will likely delay construction and other CAPEX plans with credit more expensive and order books shrinking.” A key reason the Fed is likely to keep higher rates in place for an extended period is the resiliency of the job market. As the economy weakens, however, employment is seen succumbing. Economists expect payrolls to decline in the second and third quarters, and by the first quarter of 2024, the jobless rate is expected to peak at an average of 4.9%. As high inflation and borrowing costs deal a blow to household finances, businesses are also seen pulling back. Economists project bigger declines in private investment, which include spending on equipment and structures, in the first three quarters of 2023 than they did a month ago. Those outlays are seen falling 3% on average. The monetary fuel from the government has been spent and there is no fiscal rescue package coming from D.C. anytime soon. The consumer is sacked with a record $18.8 trillion in debt and banks have cut back on lending due to the teetering housing market bubble.

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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