The Precious Metals Week in Review – January 27th, 2023

1. The US Supreme Court refused to review the convictions of two former Deutsche Bank AG precious metals traders for manipulating gold and silver prices with ‘spoof’ trade orders. The nation’s highest court without comment turned away appeals from James Vorley and Cedric Chanu, who were each sentenced to one year and one day in prison for wire fraud. Chanu and Vorley engaged in a classic “bait and switch” by placing orders they never intended to execute. Spoofing occurs when a trader enters buy or sell orders and then cancels them before they are executed, creating a false market indicator that “weaponized” the forces of supply and demand to mislead other traders. While canceling orders is not prohibited, the 2010 Dodd-Frank Act made it illegal to place orders with no intention of executing them. Transcripts of messages the two traders sent show they knew what they were doing was wrong. Young said. In one instance Vorley wrote: “This spoofing is annoying me. It’s illegal for a start.” Since anti-spoofing laws passed a decade ago, the US has prosecuted about a dozen criminal cases, including Navinder Sarao, the day trader linked to the 2010 ‘flash crash’ that erased $1 trillion in market value.

2. The ‘unelected’ global elites gathered in Davos last week to discuss their plans for controlling the world economy, but the gold market is delivering an alternative message. Among the issues being discussed at this year’s World Economic Forum is that of central bank digital currency. A presentation at the meeting based on research funded by the Bill & Melinda Gates Foundation called for central bank digital currency to serve the goal of “redesigning access to money.” Technocrats believe that they can reshape the world economy to serve their grandiose goals, whether it’s redistributing wealth or eliminating fossil fuels, or reducing the world population. Meanwhile, markets are reflecting some inconvenient truths. For one, the demand for oil is surging. As China reopens, oil consumption is on track to set a new record this year, according to the International Energy Agency. Demand for precious metals is also likely to be strong in 2023. The gold market continues to power ahead, sending a signal that the U.S. dollar and other fiat currencies are untrustworthy when it comes to retaining purchasing power. One of the alarming ideas discussed was that the United States is talking about minting a $1 trillion dollar platinum coin. Literally, the whole point of it would be they would mint the coin and then they’d put it in a vault somewhere, and then this would give the ability of the Federal Reserve to print $1 trillion and basically use it for the government to pay all the bills. And this is not the first time this has been brought up. The fact that the Treasury Department could arbitrarily declare a one-ounce platinum coin to be worth a trillion dollars and then sell it to the Federal Reserve to raise revenue shows that hyperinflation is how a sovereign debt crisis can be resolved. The problem with minting a trillion-dollar coin is that it then becomes too obvious what’s being done. The government would be telegraphing that it intends to monetize its debts by creating trillions of dollars out of thin air. That could cause holders of US dollar assets to panic. The Treasury would much rather go through the motions of increasing its borrowing capacity and selling more bonds to the Federal Reserve. But the end result will be much the same. Trillions of new dollars will be created out of thin air. And over time, as always, they will lose value.

3. The UK grid asked consumers to turn down power demand on Tuesday evening, as it struggles for a second day to plug the gap left by a dearth of wind generation. After spending about £1.3 million ($1.6 million) on Monday to incentivize households to save energy, National Grid Plc will seek to cut another 341 megawatts of demand on Tuesday between 4:30 and 6 p.m. So far, National Grid has been testing the system to set incentives at the right level to entice consumers to take part. The measure proves how vulnerable Britain remains to colder weather and fluctuations in wind output as it scrambles to alleviate its energy crunch. Monday marked the first time British households were asked to help balance the network after freezing temperatures caused demand to spike. Further, there has been a rash of wind turbine malfunctions across the US and Europe, ranging from failures of key components to full collapses. A massive 784-foot-tall turbine in Germany collapsed in September 2021. A big new turbine in Lithuania fell in March 2022. And a blade partially detached on one in Sweden last July. Some industry veterans say they’re happening more often, even if the events occur at only a small fraction of installed machines. “We’re seeing these failures happening in a shorter time frame on the newer turbines, and that’s quite concerning,” says Fraser McLachlan, chief executive officer of London-based GCube Underwriting Ltd., which ensures wind assets in 38 countries. If the failure rate keeps climbing, insurance premiums could increase, or new coverage limits could be imposed. The pressure to invest in green projects is so intense that breakdown fears haven’t yet slowed the flood of money into wind farms. However, the failure issue has become a concern for bankers and other creditors, who may begin to demand higher interest rates. Oliver Metcalfe, head of wind research at NEF said, “There’s a hesitancy among insurers and lenders about these big models that haven’t been tested yet. The technology alarm bells are ringing.” In addition, the UK’s grid operator asked three reserve coal units to be ready to supply power as it tries for a second consecutive day to plug the gap left by a lack of wind generation.

4. Florida Chief Financial Officer Jimmy Patronis blocked asset managers from investing a $5.1 billion state pension pool in sustainable funds, the latest escalation in his fight against ESG. Patronis signed a directive on Monday that bars the Florida Deferred Compensation plan, which offers supplemental pension coverage for more than 93,000 state employees, from investing in environmental, social, and governance strategies. Less than 1% of the assets are invested in “potential ESG products,” he said. “We’ve placed the burden on these fund managers to move these dollars – and if they don’t – then they’re in violation of our contracts. ESG has gone unchecked throughout the financial services sector for too many years.” Florida is among a string of Republican-dominated state governments that are lashing out against asset managers’ ‘woke capitalism,’ targeting policies that take ESG into account. Last week, Governor Ron DeSantis and state officials changed the policies on Florida’s more than $220 billion in pension funds to say that investment decisions should be guided only by potential returns. On Friday it was reported that the Republican attorneys general from 25 US states have filed a lawsuit challenging the Biden administration’s plan to allow retirement fund managers to make ‘socially conscious’ investment decisions. The suit alleges the new rule ‘undermines key protections for retirement savings of 152 million workers… totaling $12 trillion in assets in the name of social policies, including addressing climate change. “The Biden Administration is promoting its climate change agenda by putting everyday people’s retirement money at risk,” said Utah Attorney General Sean Reyes, who is leading the suit.

5. Moreover, the ongoing calamity in the crypto market tells Gemini Trust to drop another 10% of its workforce, according to a person familiar with the matter. The digital-asset firm founded by billionaire twins Tyler and Cameron Winklevoss remains pressured by a month-long industrywide slump. The company previously announced the firing of 10% of its staff in June after the collapse of the Terra stablecoin ecosystem and Three Arrows Capital hedge fund which sent token prices tumbling. Then in November, Gemini customers lost access to their money when Genesis Global Capital froze redemptions from a lending product the companies offered jointly. Genesis sought bankruptcy protection last week. The Winklevoss brothers have been waging a public battle over the millions of dollars lost via the Gemini Earn product, which had rewarded users for lending out their crypto. Gemini is listed as the largest creditor to Genesis, which owes the firm $765.9 million. The Gemini layoffs coincide with deep job cuts across the industry. They have collectively shed hundreds of jobs in the first few weeks of 2023 alone. Though crypto isn’t the only industry to see layoffs recently, companies within tech, among others, have also announced dismissals, it’s been plagued by a number of hardships, including the fall of the once-vaunted FTX empire. In addition, the job cuts industrywide are coming at a time when many analysts and economists are projecting a US recession for 2023.

6. In tech news asteroid-mining startup AstroForge Inc. plans to launch its first two missions to space this year as it seeks to extract and refine metals from deep space. The first launch, scheduled for April 2023, will test AstroForge’s technique for refining platinum from a sample of asteroid-like material. The second, planned for October, will scout for an asteroid near Earth to mine. The missions are part of their goal of refining platinum-group metals from asteroids, with the aim of bringing down the cost of mining these metals. It also hopes to reduce the massive amount of carbon dioxide emissions that stem from mining rare Earth elements on our own planet, Chief Executive Officer Matthew Gialich said in an interview. “We do our refining on site, so we are refining on the asteroid itself. We are not bringing the material back to Earth to do the refining. A lot of the waste you see from these mines is in the process of refinement.” The California-based company came out of stealth mode last May when it announced it had raised $13 million in seed funding. The company claims the October mission will be the first commercial deep-space flight outside Earth’s gravity well. Their emergence in the space industry comes a few years after the demise of an asteroid mining boom. Two of the larger companies, Planetary Resources, and Deep Space Industries were formed roughly a decade ago with the goal of mining asteroids. Neither company visited any asteroids and ultimately struggled financially. Both companies were eventually acquired and rerouted to other ventures.

7. In the week ending January 21, the advance figure for seasonally adjusted initial claims was 186,000, a decrease of 6,000 from the previous week’s revised level. The previous week’s level was revised up by 2,000 from 190,000 to 192,000. The 4-week moving average was 197,500, a decrease of 9,250 from the previous week’s revised average. The previous week’s average was revised up by 750 from 206,000 to 206,750.

8. Oil advanced as investors weighed the outlook for Chinese demand, while a weaker dollar made some commodities more attractive for buyers. West Texas Intermediate traded near $81 a barrel, after settling little changed on Wednesday. Crude has also benefited from a slump in the dollar, with a gauge of the greenback near the lowest since April. US crude inventories rose for a fifth week to the highest level since June 2021, the Energy Information Administration reported Wednesday. Still, the gain of 533,000 barrels was smaller than some market participants expected.

9. EUR/USD retreats for the second session in a row and revisits the 1.0860 regions on Friday. While above the short-term support line around 1.0690, extra gains should remain in store for the pair. Indeed, the continuation of the uptrend now needs to rapidly clear 2023 high at 1.0929 (January 26) to allow for a test of the weekly top at 1.0936 (April 21, 2022). A sustainable break above this level could pave the way for a challenge of the key barrier at 1.1000 the figure sooner rather than later.

10. The USD/JPY pair remains depressed through the early North American session and drops to a fresh daily low, around mid-129.00s following the release of the US macro data. The data cements bets for a smaller 25 bps Fed rate hike in February and acts as a headwind for the greenback. The Japanese Yen (JPY), on the other hand, draws support from fresh speculation that high inflation may invite a more hawkish stance from the BoJ (Bank of Japan) later this year.

The Federal Reserve’s preferred inflation measures eased in December to the slowest annual pace in over a year while consumer spending fell, helping pave the way for policymakers to further scale back the pace of interest-rate hikes. The personal consumption expenditures core price index, which excludes food and energy, rose 4.4% in December from a year earlier, according to data shown Friday. The overall gauge climbed 5% year-over-year, still well above the Fed’s 2% goal but both were the slowest paces since late 2021. Personal spending, adjusted for changes in prices, dropped 0.3% in December. Inflation-adjusted outlays for merchandise fell 0.9%, while spending on services stagnated, the first month without an increase since January 2022. The figures added to mounting evidence that the worst bout of inflation in a generation has passed as the Fed’s aggressive tightening campaign works its way through the economy. Officials are widely expected to once again slow the pace of rate hikes, to a quarter point next week, and will discuss how much higher they need to go to ensure prices are cooling for good. Policymakers are adamant that their work isn’t yet done, as a tight labor market threatens to keep upward pressure on wages and prices. They also point to price growth in services excluding energy and housing, which ticked slightly to 0.32% last month, according to calculations.

The Fed’s hawkish stance has many economists worried the central bank will go too far, assigning a 65% chance of a recession over the next year. Several officials still maintain that a soft landing is possible, a scenario in which inflation cools without a surge in unemployment. Obviously, there are still plenty of risks. Not a day has gone by lately when some big tech company announces that they’re slashing high-paying jobs. This could snowball into diminished spending and more layoffs elsewhere across the economy. The Fed will get more data on the labor market next week, including the fourth-quarter employment cost index — a broad gauge of wages and benefits — as well as December job openings before the conclusion of its two-day meeting on Feb. 1.

Elsewhere, Christine Lagarde said the European Central Bank will do everything necessary to return inflation to its goal, pointing to more “significant” interest-rate increases at coming meetings. Borrowing costs will have to rise at a steady pace to reach levels that are sufficiently restrictive and stay at those levels for as long as needed, Lagarde said Monday in a speech. “We will stay the course to ensure the timely return of inflation to our target,” the ECB president said. “It is vital that inflation rates above the ECB’s 2% target do not become entrenched in the economy.” So, as expected, the market continues to receive mixed messaging.

James Ferguson, the founder of MacroStrategy Partners, isn’t worried about inflation this year. Instead, he sees the beginnings of deflation. This week he said that it’s purely a matter of remembering what the monetarists said: Print money and (with a long and variable lag) you will get inflation; Yank money out of the economy (as the US Federal Reserve is doing) and you will get the opposite. According to Ferguson, there will be deflation by April. The central bankers will be thrilled, he says, until they realize they’ve caused a nasty recession. Then they will be caught out, cutting rates too fast just as the reopening of China forces up commodity prices. His outlook for inflation? It’s going to be volatile. And as he explains, this is about as dangerous an environment as there ever is for investors. So, what do you do? Ferguson says you don’t buy houses. Instead, you buy high-yielding value stocks and gold.

Volatility should be expected to remain high as investors will be closely watching 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. 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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