The Precious Metals Week in Review – February 17th, 2023

1. US Secretary of State Antony Blinken is said to be considering a meeting with Wang Yi, China’s top diplomat, at a security conference later this week. It would be their first face-to-face talk since Beijing ignited an international uproar with an alleged spy balloon lazily moving across the whole US mainland, triggering a spike in tensions between the two nuclear-armed rivals. Blinken and Wang would meet at the Munich Security Conference, which runs from Feb. 17 to Feb. 19, provided both sides agree. In the aftermath of the balloon incident, Blinken called off a long-planned trip to Beijing that was aimed at building on an emerging effort by President Joe Biden and Chinese leader Xi Jinping to rebuild frayed relations. A series of subsequent unidentified objects getting shot down over North America hasn’t helped matters, either.

2. US stocks ended Monday with broad gains after a survey showing Americans have drastically reduced their expectations for household income growth suggested that Tuesday’s consumer price data might not be as bad as once feared. The S&P 500 added 1.1%, with every sector except energy in the green. The tech-heavy Nasdaq 100 rose 1.6% following its first weekly loss of 2023. The Dow Jones Industrial Average gained the most since January. When the stock market reeled last year, the Dow Jones Industrial Average became a place where many found shelter. As risk appetite returns in 2023, they can’t exit fast enough. The 30-member gauge is up 2% this year, compared with a 7% gain in the S&P 500. The 5 percentage-point gap between the two makes the Dow’s start to a year the weakest compared to the S&P 500 since 1934. Oil prices, a key inflation component, fell on a report that the Biden administration plans to sell more crude oil from the Strategic Petroleum Reserve. West Texas Intermediate crude futures dropped below $80 a barrel. The International Energy Agency boosted its forecast Wednesday for global oil demands this year as China reopens its economy, echoing OPEC’s tighter outlook from the day before. Meanwhile, a robust dollar was pressuring almost all commodities lower, capping bulls’ ability to break out. “The trajectory for demand is improving and for supply it is not,” said Josh Young, chief investment officer at Bison Interests. “China has been buying more physical oil in the last two weeks or so. Oil bears are taking it as a sign that China is gradually reopening.” Yet two-year Treasury yields rose to a new high for the year after climbing 23 basis points last week following the much stronger-than-expected January employment data. Traders are reassessing how high US interest rates will rise this year, with inflation and jobs data looming later this week. This has fueled bets for the Fed rate to peak at 5.2% in July, up from less than 5% a month ago.

3. That said, the ever-optimistic opinions of traders could be dented as US rates may be heading higher than Wall Street or the Fed think. Last year, most US investors and central bankers underestimated how high inflation would climb. Now they may be underestimating how high-interest rates will need to go to bring it back down. Despite the Federal Reserve’s most aggressive credit-tightening campaign in four decades, the US economy and financial markets started the new year with a bang. Payrolls surged, retail sales jumped, and equity prices soared. Combined with an inflation rate that’s proving sticky and running well above the Fed’s 2% target, that’s a recipe for more rate hikes from central bank Chair Jerome Powell and his colleagues. “There’s a good chance the Fed does more than the markets expect,” said Bruce Kasman, chief economist for JPMorgan Chase. The risk is that tighter credit eventually catches up with the economy and triggers a recession, as consumers run down the financial buffers they built up during the pandemic. It’s those extra savings – Moody Analytics chief economist Mark Zandi reckons there’s still $1.6 trillion left – and a vibrant jobs market that has allowed households to ride out soaring prices and borrowing costs. Economists are marking up their estimates of what’s known as the terminal rate, the highest point that the Fed will get to. Deutsche Bank Securities chief US economist Matthew Luzzetti this week raised his forecast to 5.6% from 5.1%, citing a resilient labor market, easier financial conditions, and elevated inflation. Fed policymakers are sounding more hawkish as well. “We must remain prepared to continue rate increases for a longer period than previously anticipated if such a path is necessary to respond to changes in the economic outlook or to offset any undesired easing in conditions,” Federal Reserve Bank of Dallas President Lorie Logan said on Feb. 14. During their last forecasting round in December, Fed policymakers penciled in a peak rate of 5.1% this year, according to their median prediction. Fed watchers said they wouldn’t be surprised to see a higher number when the central bank releases new forecasts next month.

4. On Thursday gold prices are moderately up and silver slightly higher in midday US trading, in the aftermath of a US inflation report that came in hot. Gold and silver traders may reckon that recent sell-offs have already factored into the metals’ prices, the fact the Federal Reserve will have to remain hawkish for longer on US monetary policy. Today’s US producer price index report for January came in at up 0.7% month-on-month, which was well above the PPI forecast of up 0.4% from December, following a decline of 0.5% in December from November. The hotter PPI report falls into the camp of the US monetary policy hawks, who want to see the Fed continue to raise US interest rates to choke off problematic price inflation. The key outside markets see the US dollar index a bit weaker on a corrective pullback from recent good gains that saw the index hit a five-week high Wednesday.

5. Aside from Bitcoin, Ether, and a few other cryptocurrencies with a high trading volume, investing in crypto is ‘riskier’ than buying penny stocks, according to Ronald AngSiy, COO of CEO.ca, who previously worked as a blockchain expert. “Any individual can manipulate crypto prices today because of how small the market cap is,” he observed. “Once you get to the smaller cryptocurrencies, that’s where it’s significantly riskier than a penny stock for investors.” He highlighted that Tesla stock has a market cap of $650 billion, while the entire crypto market only has a market cap of $1 trillion. This makes crypto ‘easy’ to manipulate.’ “If you look at the price of a Binance token, versus the price of a Tesla stock, you’ll see how small the crypto market is,” he suggested. “It’s hard, in such a small market, to say how what’s happening in the world will directly affect prices today.” AngSiy suggested that there is “more pain ahead for crypto investors” in 2023, as the Federal Reserve continues to hike interest rates. “How that pain is manifested is hard to exactly say, because the crypto market is so small that you could have one or two front-end entities manipulate the price of the whole crypto market,” he said. He stated that since Bitcoin came into being in 2008, the crypto market has only experienced a ‘low interest-rate world,’ with the Effective Fed Funds Rate (EFFR) never rising beyond 2.5 percent until 2022. Currently, the EFFR is around 4.5 percent, and Fed Chairman Jerome Powell has said that further hikes are expected until the Fed reaches a terminal rate of around 5 percent in 2023. “We’ve never seen it [crypto] in a high and growing interest-rate world, which is what is happening right now,” he said. “When you look at low interest-rate environments, it’s easier for investors to borrow money, and then to take that money and then allocate a portion of it to crypto… now you’re seeing money being pulled back from risk assets [like crypto] and either allocated to safer assets, or you’re seeing risk assets being margin called.”

6. In technology news and speaking of Tesla, it was reported that it is recalling 362,758 vehicles due to a crash risk associated with its so-called Full Self-Driving Beta software. The system “may allow the vehicle to act unsafe around intersections,” including traveling straight through an intersection from a turn lane and continuing through steady-yellow traffic lights, according to a filing Thursday. Tesla is expected to fix the issue through an over-the-air software update by April 15, according to the US National Highway Traffic Safety Administration. The system’s errors could increase the risk of a collision if the driver does not intervene,” the NHTSA said. The agency said it first notified Tesla on Jan. 25 that it had identified “potential concerns related to certain operational characteristics of FSD Beta in four specific roadway environments” and requested that the automaker file a recall. Tesla met with the agency multiple times in the following days. The company did not concur with the agency’s analysis but decided on Feb. 7 to move forward with the recall ‘out of an abundance of caution,’ according to NHTSA. Tesla identified 18 warranty claims between May 2019 and September 2022 that “may be related” to the conditions NHTSA was concerned about but told the agency it is not aware of any injuries or deaths related to the defect.

7. In the week ending February 11, the advance figure for seasonally adjusted initial claims was 194,000, a decrease of 1,000 from the previous week’s revised level. The previous week’s level was revised down by 1,000 from 196,000 to 195,000. The 4-week moving average was 189,500, an increase of 500 from the previous week’s revised average. The previous week’s average was revised down by 250 from 189,250 to 189,000.

8. Oil prices slumped Friday, heading for a weekly decline on concerns about future U.S. economic growth following signals that the Federal Reserve is set to continue raising interest rates for longer than previously expected. By 09:35 ET (14:35 GMT), U.S. crude futures traded 3.7% lower at $75.58 a barrel, while the Brent contract fell 3.5% to $82.17 a barrel. Both contracts are on course for losses of over 4% this week. U.S. economic data released this week has pointed to inflation remaining sticky, with both consumer and producer prices coming in higher than expected in January, while retail sales are booming, and the labor market remains healthy.

9. EUR/USD bulls have come up for air near 1.0700 to a US session high of 1.0697 to meet resistance, both horizontal and dynamic. The US Dollar came under pressure again despite a slew of inflationary data over the last several days and the EUR/USD bears are out in force. EUR/USD has broken through numerous supports casting a bearish shadow in its tracks that leaves scope for a downside continuation should the 1.0650s give out in the forthcoming days.

10. Expect USD strength to ultimately prove to be short-lived. Indeed, it is believed a multi-year bearish trend in the USD is underway, with portfolio flows turning increasingly negative for the currency. Yields turning positive in Europe and Japan could spur repatriation by local investors as they have accumulated significant US fixed-income exposure since 2014. With evidence of these repatriation flows appearing, we revise our USD forecasts lower and now project EUR/USD to rise to 1.14 by end-2023 and USD/JPY to decline to 121.

Billionaire hedge fund manager John Paulson said you’re better off owning gold than dollars. Paulson said the trend is toward de-dollarization, but it will take a while to happen. While the US isn’t the economic powerhouse it once was, it remains dominant in terms of reserves and trade. But other countries, particularly China, have undercut America’s economic power. That is eroding the power of the once-mighty greenback. Other countries do not want to rely on the dollar as much as they have in the past, and the US also has an enormous deficit with the rest of the world in terms of trade and investment balances that used to be very positive, but now it’s turning negative. That points to the intermediate and long-term depreciation of the dollar versus other currencies. He also noted that the extraordinary amount of money printed by the Federal Reserve has also undercut faith in the US dollar. A lot of our growth has been based on fiscal spending that has been financed by the Fed buying the debt of the government. The Fed balance sheet has exploded due to ‘quantitative easing’, a polite way of saying ‘money printing’, and inflation resulted. If you had dollars and 9% inflation, this year you lost 9% of your money; interest rates were nowhere close to compensating for that loss. With this backdrop, a lot of investors and central banks are looking for an alternative to the dollar. As a result, Paulson said, “gold is rising again. I say again because it’s been the reserve currency of the world for thousands of years, a legitimate alternative to holding the dollar or other paper currencies.” There has been a significant increase in demand from central banks to replace dollars with gold, and we’re just at the beginning of that trend. Gold will go up and the dollar will go down, so “you’d be better off keeping your investment reserves in gold at this point” according to Paulson.

But why gold and not some other currency, such as the Swiss franc or the euro?

Paulson explains that other currencies will likely rise in value against the dollar, but each has its own issues. The European Central Bank (ECB) has also printed a significant amount of money, and if you keep your money in fiat currencies you face the risk, due to geopolitical events, that your reserves can be seized. As the central banks did with Russia. “China probably thinks that as they have so much of their reserves in dollars, if they get into a geopolitical spat with the Western world there is a possibility these reserves will be frozen like they did with Russia.”

You avoid that counterparty risk when you hold gold. This is a highly desirable characteristic that is not easily replicated. You also have the potential for appreciation. We’re at the beginning of trends that are going to increase the demand for gold, and inflation and geopolitical tensions will determine the rate at which gold increases. This year gold is expected to appreciate versus the dollar, and also on a three, five, and 10-year basis.

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.

Friday to Friday Close (New York Closing Prices)

Previous Years Comparisons

Here are your Short-Term Support and Resistance Levels for the upcoming week.

This is not a solicitation to purchase or sell.
© 2023, Precious Metals International, Ltd.