The Precious Metals Week in Review – March 31st, 2023

1. The banking crisis raises concerns about hidden leverage in the system as loans have been layered up during era of low interest rates. As traders rush to identify where the next bout of volatility will come from, some watchdogs think the answer may be buried in the huge pile of hidden leverage that has been quietly built over the past decade. The concern is that private equity firms and others were allowed to load up on cheap loans as banking regulations tightened after the global financial crisis, without enough oversight into how the debt could be interconnected. Though each loan may be small, they have often been layered up in such a way that investors and borrowers could suffer if banks or other credit providers suddenly pull back. “A slight downturn and an increase in interest rates will make some corporates default,” said Ludovic Phalippou, a professor of financial economics at Oxford University. “This puts their private debt providers in trouble and then the bank that provides leverage to the fund in trouble.” Questions about the potential threat gained urgency following the demise earlier this month of Silicon Valley Bank, a major provider of financing to venture capital and private equity funds. Credit Suisse Group, which fell into difficulties a few days later, also provided various forms of credit lines to fund managers. Although neither bank’s problems were caused by those debts, the worry is they could have triggered wider contagion if the lenders hadn’t been rescued. The recent turmoil will likely lead to deeper probes into shadow lending globally, which includes credit provided by private equity firms, insurers, and retirement funds, according to a different official with knowledge of the matter. That means identifying where the risk ended up after it moved off bank balance sheets following the financial crisis. To help spot potential problems, the BOE plans to stress test nonbank lenders including private equity firms for the first time this year.

2. Deposits at US lenders posted the biggest decline in nearly a year during the week when multiple bank failures triggered the latest bout of global financial turmoil. The decline was entirely due to a record plunge in deposits at smaller institutions. Bank deposits fell by $98.4 billion to $17.5 trillion in the week ended March 15, according to data released Friday by the Federal Reserve. Deposits at small banks slumped $120 billion, while those for 25 largest firms rose almost $67 billion. So-called “other” deposits, which exclude accounts with maturity dates such as certificates of deposit, declined by $78.2 billion to $15.7 trillion. Compared with a year ago, these more liquid deposits such as savings and checking accounts have declined by 6.1%, the most in data back to the early 1970s.

3. The gold market retreated as better-than-expected US data and hawkish comments from St. Louis Fed President James Bullard weighed on prices. But analysts don’t see gold’s bullish uptrend reversing soon. Bullard said Friday that as the banking sector stress eases, the Federal Reserve will have to raise rates higher. Bullard remained hawkish “in reaction to the stronger economic news and also on the assumption that the financial stress abates in the weeks and months ahead.” He raised his terminal rate estimate to a 5.50%-5.75% range, while his colleagues kept their target primarily between 5.00% and 5.25%. But the bond market is potentially signaling that a Fed pivot is coming, RJO Futures senior market strategist Frank Cholly said recently. “The bond market is telling us we will get a rate cut. That is favorable for gold. We see a slight correction after a big rally. But that is not enough to change the trend,” Cholly said. “It could be as early as June that we see the Fed start to cut.” In the short term, analysts do not rule out a reversal in gold after its quick gains. But the overall trend will remain intact, taking prices above $2,000 an ounce. The banking crisis, combined with the Fed rate hike expectations easing, is creating ‘true risk-off haven flow.’ “We are not done with the banking problem. There is a flight of capital from regional banks, and we might see structural failure. How deep it stretches is the problem. There is also the moral hazard of backstopping all depositors. Can’t go on a case-by-case basis,” Forex’s senior strategist Michael Boutros said. “With regards to gold, it is a constructive move.”

4. No one sells the future more masterfully than the tech industry. According to its proponents, we will all live in the “metaverse,” build our financial infrastructure on “web3” and power our lives with “artificial intelligence.” All three of these terms are mirages that have raked in billions of dollars, despite being bitten back by reality. Artificial intelligence conjures the notion of thinking machines. But no machine can think, and no software is truly intelligent. The phrase alone may be one of the most successful marketing terms of all time. Last week OpenAI announced GPT-4, a major upgrade to the technology underpinning ChatGPT. The system sounds even more humanlike than its predecessor, naturally reinforcing notions of its intelligence. But GPT-4 and other large language models like it are simply mirroring databases of text. These systems are trained to generate text that sounds plausible, yet they are marketed as new oracles of knowledge that can be plugged into search engines. That is foolhardy when GPT-4 continues to make errors. Only a few weeks ago, Microsoft and Alphabet’s Google both suffered embarrassing demos in which their new search engines glitched on facts. We need a different lexicon that doesn’t propagate magical thinking about computer systems and doesn’t absolve the people designing those systems from their responsibilities.

5. The pace of US wind farm installations cooled in 2022 despite the Biden administration’s push to encourage more renewable energy, due in part to declining tax breaks for developers. US wind energy developers installed 6.7 gigawatts of power generation capacity last year, a 56% drop from the prior year. One gigawatt is about equal to the electric generating capacity of a large nuclear reactor or natural gas-fired power plant. So far, developers have already identified a five-year project pipeline of 77.2 gigawatts, which means the industry would need to install an average of 15.4 gigawatts of wind capacity annually to meet the figure, S&P said in the report.

6. The US took its most forceful move yet on Monday to crack down on crypto exchange Binance Holdings and its chief executive officer Changpeng Zhao. The Commodity Futures Trading Commission alleged in federal court in Chicago that Binance and its CEO, who is known as CZ, routinely broke American derivatives rules as the firm grew to be the world’s largest trading platform. Binance should have registered with the agency years ago and continues to violate the CFTC’s rules, according to the regulator. “The defendants’ own emails and chats reflect that Binance’s compliance efforts have been a sham and Binance deliberately chose – over and over – to place profits over following the law,” said Gretchen Lowe, chief counsel in the CFTC’s enforcement division. The CFTC is a civil government agency, so it can’t bring criminal charges against firms or seek jail time for individuals. However, cases from the regulator can result in hefty fines and other penalties against companies and individuals. The CFTC also alleges that Binance failed to implement an effective anti-money laundering program. It also didn’t establish necessary safeguards for determining the true identity of customers, the agency said. The complaint says that as of at least May 2022, the company had not filed a single suspicious activity report in the US. In addition to suing CZ and several Binance entities, the CFTC also alleged that Samuel Lim, Binance’s former chief compliance officer, broke its rules.

7. News from Wednesday exposed that failed FTX’s front man Sam Bankman-Fried paid a $40million bribe to at least one Chinese government official to unfreeze $1billion worth of cryptocurrency. Further, according to the new indictment, Bankman-Fried and his associates tried ‘numerous methods’ to unfreeze the accounts in November 2021. He then allegedly used the money to help fund Alameda’s failing trades and was able to defraud customers and investors for another year before the cryptocurrency exchange imploded. SBF was ultimately forced to declare FTX bankrupt in November 2022 as concerns about the missing funds led to a bank-run.

8. In the week ending March 25, the advance figure for seasonally adjusted initial claims was 198,000, an increase of 7,000 from the previous week’s unrevised level of 191,000. The 4-week moving average was 198,250, an increase of 2,000 from the previous week’s unrevised average of 196,250.

9. Crude oil inventories in the United States fell this week by 6.076 million barrels, the American Petroleum Institute (API) data showed on Tuesday, in a major divergence from the 187,000-barrel build that was expected. Oil prices traded up on Tuesday in the run-up to the data release as banking collapse fears eased and 400,000 bpd of crude exports from Kurdistan were shut in. By 4:17 p.m. EST, WTI was trading up $0.62 (+0.85%) on the day to $73.43 per barrel, a gain of about $4 per barrel on the week. Brent crude was trading up $0.68 (+0.87%) on the day at $78.80—up roughly $3.50 per barrel from this same time last week.
10. EUR/USD has gained traction and recovered toward 1.0900 in the early American session on Friday. The data from the US showed that the annual Core PCE Price Index, the Fed’s preferred gauge of inflation, edged lower to 4.6% in February, weighing on the US Dollar.

11. If/when uncertainty about the global macro and geopolitical backdrop decreases, EUR/USD should move higher. USD/JPY on the other hand needs more BoJ action to justify a big move lower unless Fed easing becomes a realistic short-term prospect. If the BoJ does nothing, and Treasury yields don’t fall, USD/JPY will probably rise. We expect the next policy move in June, which doesn’t really suggest that USD/JPY will break out of its 128-138 year-to-date range.

A decent rule of thumb is that potentially all cryptocurrency exchanges are committing crimes, and you’re lucky your exchange is only processing the crimes. On Monday, the US Commodity Futures Trading Commission sued Binance Holdings, Changpeng Zhao’s big crypto derivatives exchange, for letting Americans trade crypto derivatives. It is illegal to run a crypto derivatives exchange in the US without registering it with the CFTC, and it’s not exactly easy to do. If you have crypto derivatives exchange abroad but have not registered it in the US, it is illegal to let US customers trade on it. So, the basic rule is that US customers can’t trade crypto derivatives, and big international crypto derivatives exchanges (Binance, FTX before it blew up) sometimes have US-only platforms (Binance US, FTX.us) that let US customers trade a limited set of products, but not most derivatives. For retail customers this is probably fine: A crypto exchange can make a bit more money from retail gamblers if it offers them high-leverage futures trading, but there are plenty of gamblers in the world, and also you can make decent money from US traders just by letting them trade crypto for cash. The CFTC complaint contains a certain amount of retail-focused subterfuge. (Binance has a website with an explanation of how to use a virtual private network to log into Binance without disclosing that you are in the US, and the CFTC doesn’t like that) But what is striking about the complaint is that it is mostly about how Binance offered trading services to large New York and Chicago high-frequency trading firms through their offshore subsidiaries. Binance formalized its processes for instructing US VIP customers on the best methods to evade Binance’s compliance controls in a corporate policy titled “VIP Handling.” Pursuant to the VIP Handling policy, once a customer service representative “hands the affected user over to VIP,” the VIP team would “make sure the user has completed his/her new account creation with no US documents allowed.” US VIP customers often followed these instructions by submitting “new” documentation associated with a shell company incorporated in a jurisdiction other than the United States, such as the British Virgin Islands, to act as the nominee for the “new” account. For these customers, Binance instructed its personnel to inform the user that the reason why he/she can’t use our www.binance.com is because his/her IP is detected as US IP. The last few weeks have seen a wide-ranging and aggressive US crackdown on crypto. The financial world is interconnected, and everything touches the US at some point, and US regulators have become experts at using that fact to get authority over the whole financial world. And now they are coming for Binance.

The Federal Reserve will keep raising interest rates despite traders betting otherwise as fears of a banking crisis convulse markets, according to BlackRock. The world’s biggest money manager favors inflation-linked bonds, securities that offer protection from rising prices, on the view markets are wrong in expecting imminent US rate cuts as the economy lurches toward a recession. This time is different as the Fed and its peers have made clear that troubles buffeting the banking sector won’t halt their battle against inflation, BlackRock Investment Institute strategists including Wei Li wrote in a client note. “We don’t see rate cuts this year – that’s the old playbook when central banks would rush to rescue the economy as recession hit,” the strategists said. “We see a new, more nuanced phase of curbing inflation ahead: less fighting but still no rate cuts.” Recent economic data give credence to BlackRock’s view that the Fed may be “underestimating how stubborn inflation is proving due to a tight labor market.” US core consumer prices rose in February, while research from the New York Fed found inflation seemed poised to stick around for longer than previously expected. “We think the Fed could only deliver the rate cuts priced in by markets if a more serious credit crunch took hold and caused an even deeper recession than we expect,” the BlackRock strategists said.

It is relatively common that what should be recognized as a warning flag of major trouble is often ignored until things get so bad that it is almost impossible not to notice. Geopolitical, economic, and environmental uncertainty can be expected to continue in the near-term. Astute investors continue to seek out alternative investments for their portfolios to aid in diversifying them away from overexposure to any single asset class. Some are seeking out buying opportunities from temporary price dips to add more physical precious metals into their portfolios. 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.

Friday to Friday Close (New York Closing Prices)

Month End to Month End Close

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.