The Precious Metals Week in Review – February 10th, 2023

1. The global economy and financial markets are at a crossroads. After a year of grappling with rampant inflation that spurred central banks to embark on their most aggressive tightening campaign in decades, some investors are starting to see the possibility of a soft landing that avoids a brutal recession. But policymakers warn that they haven’t yet finished the job and that prematurely declaring victory would only cause more pain down the line. We asked three prominent investors, who collectively oversee almost $2 trillion, about the next big risk they see coming over five to 10 years. The next significant risk is recessions that are deeper and longer than what we’ve been accustomed to. When the economy’s going down, reversing it is a win-win for everybody because growth is a disaster and there’s no inflation. Just ease everything. That means recessions could never be deep and long. They were quick and shallow because there was always a savior. And we’re going into a world where that’s just not what it’s going to look like anymore. Every time the economy slows, it’ll be painful because central banks will want to ease, and at the same time will be struggling with sticky inflation. Covid was a turning point because, for the first time, you had fiscal policymakers get deeply involved in solving the problem. You didn’t just have money printing like you did coming out of 2008. You had policymakers basically come in and direct the money to people. Now you’re getting it directed towards environmental outcomes in the Inflation Reduction Act. So, to me, the dam has been broken and fiscal policymakers are now part of the story and can try to solve the problems. Recessions are going to feel different because now suddenly political actors are part of the solution. They’ve experienced what happened in Covid and realize they can impact the outcome. So, they’re much more likely to step in with big fiscal expansions.

2. US dollar hegemony has long been a standard feature of the global financial and economic system. But developments in recent years and months suggest there are more than a handful of countries who are looking to rely less on the US dollar. Instead, countries who have long been at the mercy of the US dollar are looking to take their finances into their own hands…and gold is set to play a key role. The US and China are reportedly taking steps to renew their engagement and cooperation; however, it is one step forward and 10 steps backward. The US political dysfunction over raising the debt ceiling is the latest crack in rapidly disintegrating international cooperation. China, one of the largest foreign holders of US debt (China holds about US $870 billion in US government debt), is weighing in on the issue by telling the US to solve its own debt problems. The Chinese Embassy said on Tuesday “the biggest contribution that the US can make to the debt issues outside the country is to act on responsible monetary policies, cope with its own debt problem, and stop sabotaging other sovereign countries’ active efforts to solve their debt issues.” The post covid environment of the soaring US dollar, high inflation, and interest rate hikes by the Federal Reserve and other central banks have added to the debt burdens and have increased servicing costs. So, what does all this mean for holders of physical silver and gold? It means once again that zero counterparty risk is a huge benefit [maybe the biggest] of holding metals. Ghana itself has finally seen this wisdom and begun forcing gold producers in that country to sell portions of production to the government. China, for much the same reason, is buying physical gold from other countries and from gold miners within its jurisdiction. In fact, China recently announced they have record holdings of gold.

3. People around the world are taking drastic steps to cope with rising energy costs: bubble-wrapping their windows, skipping showers, and sitting in the dark. Despite a mild winter in places like New York City and London, the global energy crisis is hammering people who are grappling with inflation that is driving up the cost of pretty much everything. On Friday, Russia said it would cut its oil output by 500,000 barrels a day next month in retaliation for western energy sanctions, sending oil prices higher. Even before Russia’s invasion of Ukraine sent consumer energy bills soaring, a jump in post-pandemic demand and the transition to renewables had made the world’s energy system more fragile and prone to shock. Energy prices in 2023 were already expected to be 75% above their average over the past five years, even if, as forecast, costs moderate this year compared to 2022. The IEA estimates that the number of people living in households that spend at least 10% of their energy on energy increased by 160 million between 2019 and 2022, contributing to inflationary pressures and the looming risk of a global recession. At greatest risk are the estimated 75 million people worldwide who recently gained access to electricity and are now likely to be unable to pay for it. That would mark the first time the number of people without power has climbed since the organization began tracking it 20 years ago.

4. Binance, the world’s largest cryptocurrency exchange, said it’s temporarily suspending deposits and withdrawals of US dollars using bank accounts and will work to restart the service soon. The suspension will start Wednesday, according to a Binance spokesperson. No reason was given for the suspension. Bank transfers using other fiat currencies, such as euros, are unaffected, the representative said. Crypto companies have had difficulties finding banking partners to facilitate the sending of money to buy and sell digital assets. Following the collapse of FTX, banks have been warned by federal regulators of the risks of doing business with crypto firms. Last month, Binance said its banking partner Signature Bank would handle user transactions only if they’re for more than $100,000 as the lender decreases its exposure to digital-asset markets. The New York-based bank said in December it intends to cut as much as $10 billion in deposits from crypto clients.

5. The government of China launched a concerted effort to promote the use of its central bank digital currency (CBDC), the digital yuan, during the recent Lunar New Year celebration in a bid to help increase the adoption of the e-CNY. According to a report, there were almost 200 digital yuan-related activities launched during the Spring Festival across the country that saw more than 180 million ($26.6 million) of the digital fiat passed out to citizens in various forms, including subsidies, consumption coupons, and other programs. All manner of businesses participated in the digital yuan consumption promotions, including mobile providers, supermarkets, and tourism companies. In one example cited by the Global Times, the local government in Shenzhen handed out over 100-million-yuan ($14.7 million) worth of e-CNY to subsidize the city’s catering industry. While the rate of adoption for the e-CNY has been slow to this point, officials noted an increase in demand over the latest Spring Festival period, with the government of Hangzhou in Eastern China’s Zhejiang Province reporting that the digital yuan they distributed was taken up by residents within nine seconds of its release.

6. The US is preparing to slap a 200% tariff on Russian-made aluminum as soon as this week to keep pressure on Moscow as the one-year anniversary of the invasion of Ukraine nears. President Joe Biden has yet to give the official go-ahead, and there have been concerns in the administration about collateral damage to US industries, including aerospace and automobiles. The move against aluminum also continues efforts by the US and European Union to blunt Russia’s role as a global commodities powerhouse. The EU has banned imports of Russian oil, gas, and fuels in an attempt to cut its reliance on Moscow. The impact of that move, however, has been mitigated by a redrawing of the global oil trade map, with most crude supplies going now to China and India at lower prices. There’s no indication so far that the EU is planning a similar move on Russian aluminum. Russia, the world’s largest aluminum producer after China, has been a significant source of material for the US market. Such a steep tariff would effectively end US imports of the metal from Russia. While the country has traditionally accounted for 10% of total US aluminum imports, the amount has dropped to just more than 3%, according to US trade data.

7. For those betting against the world’s ability to kick its carbon addiction, the commodities boom of the past few years has provided fresh ammunition. The metals demand from the energy transition “may top current global supply,” the International Monetary Fund warned in a 2021 analysis. Difficulty securing materials such as lithium, cobalt, tellurium, and copper could hamper the shift to cleaner energy, Imperial College London’s Energy Futures Lab wrote in December. New data from the US Geological Survey show why some of those fears are likely to be overblown. The latest figures show a boom in supplies of many of the most important minerals for the energy transition. Lithium reserves are up 18% from last year. Cobalt has seen a 9.2% gain. Rare earth, which has a range of high-tech applications including magnets in electric car motors and wind turbines, saw reserves up 8.3% after standing still for at least five years. Fears of catastrophic shortfalls aren’t so much a prophecy of doom as a corrective that ensures the right investments are made to guarantee supply always meets demand.

8. In the week ending February 4, the advance figure for seasonally adjusted initial claims was 196,000, an increase of 13,000 from the previous week’s unrevised level of 183,000. The 4-week moving average was 189,250, a decrease of 2,500 from the previous week’s unrevised average of 191,750.

9. Oil prices rose more than 1% on Friday, heading for weekly gains, as Russia announced plans to reduce oil production next month after the West imposed price caps on the country’s oil and oil products. Brent crude futures rose $1.41, or 1.67%, to $85.91 a barrel. US West Texas Intermediate (WTI) crude futures were up $1.14, or 1.46%, at $79.20. Both contracts rose by more than $2 earlier in the session and were on course for weekly gains of close to 8%.
10. EUR/USD continues to trade in negative territory at around 1.0700 in the second half of the day on Friday. The data from the US showed an improvement in consumer confidence in early February alongside a slight increase in one-year inflation expectation, helping the USD hold its ground.

11. The USD/JPY remains downward biased, but buyers reclaiming the 20-day EMA at 130.72 could put into play the psychological 131.00 level. The Relative Strength Index (RSI) suggests that a bearish continuation is likely, while the Rate of Change (RoC) shifted neutral.

A record number of Americans expect a stock-market slump in 2023 and a majority sees inflation accelerating, according to a poll of economic expectations, even as price growth is slowing. The annual Gallup poll, which ran from Jan. 2 to Jan. 22, showed that Americans’ outlook on five economic metrics, economic growth, the stock market, unemployment, interest rates, and inflation was largely negative. Four in ten Americans predicted unemployment would rise, with the remainder split between a decline and a steady rate. A majority said borrowing costs and the inflation rate would increase, although the share who thought price growth would quicken fell from last year’s record. The survey results reflect widespread economic unease, which Gallup researchers attributed to still-high inflation, interest-rate hikes, and widespread tech-sector layoffs to cap off the year 2022. Though the US consumer has proven resilient thus far and the jobless rate is at the lowest level since 1969, the findings could indicate a cautious approach to the coming months as the Federal Reserve focuses on reducing inflation without triggering a spike in unemployment. This year also marked the first time that more Americans thought economic growth would decrease than increase, according to Gallup, although the polling agency noted that it’s likely Americans held similar views during the Great Recession.

The decline in cryptocurrencies gained momentum Thursday as signs of a regulatory crackdown on the industry and a broader pullback from risk assets weighed on investor sentiment. Bitcoin, the largest digital coin by market value, fell as much as 4.9%, its worst performance since the end of January. Others also lost ground, with Ether dropping more than 5%. Dogecoin and Avalanche, meanwhile, each fell more than 8%. The drops followed news that exchange Kraken will pay $30 million to settle Securities and Exchange Commission allegations that it broke US securities rules with its crypto asset staking products and will discontinue them as part of the settlement. Meanwhile, Coinbase Global head Brian Armstrong escalated his war of words with the SEC, warning that he’d heard rumors the agency wants to “get rid of” crypto staking by retail investors. Blockchains that use staking add up to 23% of crypto’s total market cap. Meanwhile, US stocks also fell on Thursday, with the S&P 500 headed toward its third session lower out of four this week. The Nasdaq 100 dropped 1.2%. Market analysts have noted how closely crypto and equities have moved with one another, meaning that when stocks are selling off, crypto often is, too. “It’s a risk asset,” Chuck Cumello, president and chief executive officer of Essex Financial Services, said in an interview. “It performs much more in line like a long-duration asset, a tech stock — something very volatile. Just as tech stocks sold off, Bitcoin sold off.”

After toppling household names like Toys “R” Us and Sears and forcing the closure of thousands of stores across the world, retail bankruptcies went on something of a hiatus in the post-pandemic era. Central bank stimulus made rescue financing widely available for even the most troubled retailers while consumers spent freely thanks to pandemic stimulus checks. Now, with borrowing costs soaring, savings accounts shrinking, and inflation putting a check on discretionary purchases, too many physical stores and too much debt, are surfacing again. Party City fell into Chapter 11 bankruptcy in January. Home decor chain Tuesday Morning is at risk of its second bankruptcy in less than three years. And Bed Bath & Beyond, which was declared in default by its lenders last month, may have staved off its demise with an eleventh-hour $1 billion equity deal. More retailers are likely to be pushed to the brink in the coming months. The default rate among junk-rated US retailers could reach 12% this year compared to a near rock-bottom low of 0.2% at year-end, according to Fitch Ratings. With $67 billion in outstanding bonds across those firms, about $8 billion is on the line. “These retailers’ financial models didn’t make sense anymore, their debt loads didn’t make sense anymore, and they shouldn’t have been functional companies anymore,” says Craig Ganz, a bankruptcy lawyer. “A whole slew of these retail companies just can’t survive.” One of the biggest difficulties facing the firms is that consumers just aren’t shopping as much as the stimulus-driven spending of the pandemic era runs out. US retail sales fell by the most in a year in December, recent Department of Commerce data showed. While restructuring professionals generally don’t expect the same level of carnage that followed the 2008 financial crisis, the latest wave of stress will continue to separate winners from losers. “We’re going to see what I refer to as the continuing Darwinism effect on retail,” says Perry Mandarino, head of restructuring at B. Riley. “Only the strongest survive.”

Side hustles are twice as prevalent as government data suggests, indicating that more Americans need to work multiple jobs to make ends meet amid historically high inflation. Nearly 10% of workers reported having a main job plus at least one other side gig, according to the latest work-from-home survey. By contrast, the January employment report showed 8 million, or about 5% of US workers had multiple jobs, according to the Labor Department. Despite a strong labor market underscored by historically low unemployment and solid wage gains, the cost of living is still a huge financial strain for many Americans. That’s leading them to load up on credit cards and tap into savings to make ends meet, and, in some cases, pick up another paycheck.

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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