The Precious Metals Week in Review – January 6th, 2023

1. Happy New Year! And to start off this New Year we have the International Monetary Fund Managing Director Kristalina Georgieva warning that the global economy faces “a tough year, tougher than the year we leave behind. We expect one-third of the world economy to be in recession,” Georgieva said in an interview aired on Jan. 1. “Why? Because the three big economies, US, EU, China, are all slowing down simultaneously.” The IMF already warned in October that more than a third of the global economy will contract and that there is a 25% chance of global GDP growing by less than 2% in 2023, which it defines as a global recession. Examining the three biggest economies, Georgieva painted a mixed picture of their ability to withstand the downturn. While “the US may avoid recession,” the European Union has been “very severely hit by the war in Ukraine, half of the EU will be in recession next year,” she said. At the same time, China faces a “tough year.” The slowdown in the biggest economies “translates into negative trends globally, when we look at the emerging markets in developing economies, there, the picture is even direr,” Georgieva said. Still, the outlook for the world’s largest economy may offer respite. “If that resilience of the labor market in the US holds, the US would help the world to get through a very difficult year,” Georgieva said.

2. European equities advanced on the first day of trading in 2023 as traders assessed cheaper valuations following last year’s slump. UK and Swiss markets remain shut for a holiday. The Stoxx Europe 600 rose 0.9% at 15:53 p.m. CET, with volumes 63% below the average over the past 30 days. Automotive, energy and retail shares led gains. However, by Thursday European stocks dipped after a three-day winning streak as minutes from the Federal Reserve’s meeting sounded a cautious tone on interest rates. European shares slumped 13% in 2022, a year marked by aggressive central bank tightening and the war in Ukraine. Investors fled equities over concerns about stubborn inflation, an energy crisis, and a looming recession. That sent the Stoxx 600 trading at about 11.9 times forward earnings, below the average of 14.5 over the past decade. “The first half remains very difficult given worsening liquidity and the lagged effects of the financial tightening,” said Ulrich Urbahn, head of multi-asset strategy and research at Berenberg. “Once the inflation hump is over, markets are likely to focus on growth. Growth is likely to weaken before improving later in the year.” Cheaper valuations, low-risk positioning, and high cash balances are among the factors promising a better year for investors than 2022, he said.

3. Chinese shares are off to a strong start in 2023, putting behind a dismal year as fears of isolationist policies give way to signs of an economic powerhouse turning friendlier to both the outside world and its own entrepreneurs. The MSCI China Index has risen 5.3% since trading resumed on Tuesday, marking the best start to any year since 2009, after losing nearly 24% in 2022. Leading the rally were debt-laden property developers and technology firms emerging from two years of a regulatory storm. The world’s second-biggest stock market is looking like an investor darling again, as optimism about the eventual benefits of Beijing’s abrupt end to Covid curbs outweighs concerns over the short-term pain it inflicts. The euphoria has spread beyond equities. The offshore yuan strengthened 0.5% against the dollar, while dollar bonds of some of China’s distressed developers saw sharp gains.

4. More news from China said it would hit back at nations that placed Covid restrictions on its travelers for “political goals,” showing the coronavirus still is a politically sensitive subject in Beijing. “We believe that some countries’ entry restrictions targeting only China lack scientific basis and some excessive measures are unacceptable,” Foreign Ministry spokeswoman Mao Ning said Tuesday at a regular press briefing in Beijing. “We firmly oppose attempts to manipulate Covid prevention and control measures to achieve political goals, and China will take corresponding measures based on the principle of reciprocity in different situations,” she said, without naming any individual countries. In April 2020, former Australian Prime Minister Scott Morrison upset China by calling for an international investigation into the origins of Covid. Beijing later placed trade sanctions on several Australian exports, including wine, barley, and meat. She added that China was ready to “strengthen communication with the international community and work together to defeat Covid.” The US, Japan, and some other countries are requiring travelers from China to show a negative test before allowing them to enter, and Taiwan has said it will quarantine positive cases. Covid-19 has been a politically sensitive topic in China since first appeared in the nation some three years ago.

5. US Treasuries headed for the strongest start to a year in more than two decades as investors scooped up government debt on wagers the Federal Reserve will further slow its pace of rate hikes as inflation cools. The benchmark 10-year yield fell as much as 15.5 basis points to 3.72%, a slide beaten only by the 20 basis-point tumbles on the first day of trading in 2001. Its German counterpart dropped 5 basis points to 2.38% after year-on-year inflation figures for two regional states slowed for a second month, a sign price pressures may be easing. Overall, German inflation later slowed more than forecast in December. Lower oil prices also supported improved sentiment in the Treasury market, which suffered a record annual loss in 2022 as soaring inflation drew an aggressive response from the Fed. While yields ended the year off their highs, bond bears had the upper hand during the final two weeks of December, especially in Europe.

6. Fallen crypto whiz-kid Sam Bankman-Fried appeared in court in Manhattan on Tuesday to enter pleas of not guilty to multiple alleged offenses, including wire fraud and conspiracy. Though some of his former colleagues at the now-defunct FTX and Alameda Research have already pleaded guilty to their own fraud charges, Bankman-Fried’s continued dedication to his own narrative, largely, that he knew nothing about what was going on at the trading platform he owned 90% of and that he messed up but didn’t knowingly commit wrongdoing. And Bankman-Fried isn’t the only one. In December, crypto trader Avraham Eisenberg was arrested and charged with fraud, and accused by prosecutors of rigging a decentralized digital asset exchange in an attempt to steal $110 million. At the time of the exploit, the question wasn’t whether Eisenberg actually did what he was accused of, he appeared to confess directly on his Twitter account, calling it a “highly profitable trading strategy.” The question, instead, was whether what he did was punishable by law, or, as he claimed on Twitter, “legal open market actions.” The gray area of crypto left room for interpretation. Using tweets as a way to speak your desires into existence is a core part of the way that crypto markets operate. Typical tokenomics dictate that when a new crypto coin is launched, a certain amount of hype is needed to drive up the price. Hordes of bots flood users’ timelines every day with tweets about how awesome this new project is, or how life-changing the blockchain technology behind it will be. The only problem is that the rest of the world outside of Twitter is harder to convince. The prosecution of Sam Bankman-Fried has shown that authorities are growing much more comfortable with assigning crypto misbehavior into their existing boxes of securities or commodities fraud. John J. Ray, FTX’s new CEO, said its demise wasn’t anything special or new, but just “plain old embezzlement.”

7. US companies added more jobs than expected in December, driven by small- and medium-sized businesses, highlighting the resilience of labor demand that’s underpinning wage growth. In the week ending December 31, the advance figure for seasonally adjusted initial claims was 204,000, a decrease of 19,000 from the previous week’s revised level. The previous week’s level was revised down by 2,000 from 225,000 to 223,000. The 4-week moving average was 213,750, a decrease of 6,750 from the previous week’s revised average. The previous week’s average was revised down by 500 from 221,000 to 220,500.

8. Total non-farm payroll employment increased by 223,000 in December. Notable job gains occurred in leisure and hospitality, health care, construction, and social aid. Payroll employment rose by 4.5 million in 2022 (an average monthly gain of 375,000), less than the increase of 6.7 million in 2021 (an average monthly gain of 562,000).

9. On December 8, Brent crude oil reached its lowest price in 2022, at $75/b. The spot price of Brent crude oil closed the year at $85/b, $7 higher than on January 3, 2022. The average Brent price across the month of December was lower than in January. The spot price of West Texas Intermediate (WTI) crude oil followed a similar price path to Brent crude oil. The WTI crude oil price averaged $5/b lower than Brent crude oil in 2022, compared with $3/b lower in 2021. The Brent-WTI crude oil price spread widened in 2022 relative to 2021 because of strong demand in Europe to replace crude oil supplies previously supplied by Russia.

10. The euro traded around $1.05, not far from a seven-month high of $1.07 hit on December 30th, as investors digested the latest inflation readings. Fresh data showed price pressure eased more than expected in the Eurozone, with the annual inflation rate hitting a four-month low. Inflation also eased in Germany, France, Italy, and Spain, as energy costs cooled amid a retreat in natural gas prices.

11. The Japanese yen weakened moving away from a seven-month high of 129.5 reached earlier after data showed that US private employment increased more than expected in December, giving the Fed room to keep raising interest rates. Meanwhile, the yen gained for the second straight month in December on growing speculations that the Bank of Japan might soon shift away from its ultra-easy policy after it unexpectedly raised the upper limit of its tolerance band on 10-year government bonds to 0.5% from 0.25% last month.

US stocks retraced earlier gains after policy minutes from the Federal Reserve’s latest meeting showed officials reiterating their resolve to tamp down on inflation. Federal Reserve Bank of Kansas City President Esther George said the US central bank should raise its benchmark interest rate above 5% and hold it there well into 2024 to bring inflation down. “I have raised my forecast over 5%,” George said Thursday in an interview, referring to her projection for the federal funds rate. “I see staying there for some time, again, until we get the signals that inflation is really convincingly starting to fall back toward our 2% goal.”

Policymakers are also concerned that inflation will remain entrenched if the labor market stays resilient. Investors were briefly heartened after several Fed officials said that there was a need to balance two-sided risks. But they subsequently assessed what the meeting minutes highlighted, that the Fed will have to do more if markets do not cooperate. Here are the key takeaways from minutes of the Fed’s Dec. 13-14 meeting, released Wednesday:

• A number of officials stressed that the decision to step down to a 50 basis-point hike, following four straight 75 basis-point increases, “was not an indication of any weakening of the committee’s resolve to achieve its price-stability goal” nor a judgment that inflation was persistently slowing
• Fed warns financial markets not to underestimate the central bank’s resolve to bring down inflation, as minutes cite policymakers saying: “An unwarranted easing in financial conditions, especially if driven by a misperception by the public of the committee’s reaction function, would complicate the committee’s effort to restore price stability”
• Risk of higher inflation seen as a key factor shaping the outlook for policy
• Minutes give a little hint on whether the next rate hike is more likely to be 25 or 50 basis points, saying the FOMC “would continue to make decisions meeting by meeting”
• Staff economic outlook was less weak than in the prior FOMC meeting; staff sees the possibility of a recession as a “plausible alternative to the baseline” after previously viewing odds at close to 50-50

“The Fed wanted to send a message to the market that they would not be easing or cutting rates anytime in 2023,” said Joe Gilbert, portfolio manager for Integrity Asset Management. “However, we must remember that the Fed also did not forecast raising rates by 400 basis points twelve months ago, so the forecasting ability of their own actions is sometimes quizzical.” Investors are parsing a slew of economic data on Wednesday. The latest numbers from the Institute for Supply Management underscored improving supply chain conditions, declining input prices, and slower demand, all developments the Fed would welcome. But job openings data pointed to a robust labor market, which shook sentiment earlier in the session.

Based on Friday’s report, US job growth stayed solid last month, and the unemployment rate fell while wage gains cooled, indicating a resilient labor market that nevertheless may give room for the Federal Reserve to further slow interest-rate hikes. US stock futures rose along with Treasuries and precious metals as investors speculated the easing in wage pressures would lead the Fed to pursue a less restrictive policy in the coming months. However, we continue to see mixed messages between the Fed and market participants regarding future rate movement. The figures underscore both the enduring strength of the jobs market and how a persistent imbalance between the supply and demand for labor is keeping upward pressure on earnings. That said, the welcome uptick in participation paired with a slowdown in wage growth suggests some of the tightness in the labor market is starting to unwind. A sustained deceleration in wage growth could offer some comfort to central bank officials that a key part of the inflation puzzle is losing steam.

As we begin a new year amid continuing geopolitical tensions, volatility should be expected to remain high. Investors will be closely watching the Federal Reserve for hints on upcoming monetary policy direction. Many investors have redoubled their efforts to ensure that their portfolios are sufficiently diversified in the hopes that they will be able to withstand corrections in multiple market sectors. Many of these investors have included physical precious metals as part of their diversification plans, given their long history as a hedge against both inflation and during times of economic turmoil. Such investors have continued to acquire physical precious metals as a percentage of their investment portfolio whenever temporary price dips have provided them with the opportunity to do so at a discount. Remember, the key to profitability through the ownership of physical precious metals is to own the physical product and hold it for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long run.

Trading Department – Precious Metals International Ltd.

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