The Precious Metals Week in Review – April 14th, 2023

1. The latest minutes from the March Federal Open Market Committee meeting show that the Fed is highly concerned that the recent meltdown in the banking sector could lead to a recession later in 2023. The DJIA plunged more than 100 points on Friday, but still managed to eke out a fourth straight positive week as precious metals continued their own positive moves, for the most part.

2. In Europe, concerns continue to escalate that its commercial real estate sector could be the next economic crisis in the making. If the sector takes a blow, it will follow on the heels of the banking crisis that began in March and still seems to be well underway. The primary fear seems to be that the two could trigger a “self-feeding loop” in which continued bank runs could trigger a downturn in the property sector with some analysts forecasting that real estate stocks could fall between 20 to 40% by next year. The European Central Bank has already warned earlier this month that there appear to be “clear signs of vulnerability” in the property sector due to “declining market liquidity and price corrections.” The ECB called for new limits on commercial property funds to reduce the risks that a liquidity crunch could trigger the next financial meltdown.

3. The International Monetary Fund (IMF) announced this week that it expected global growth to be around 3% five years from now. That would be the lowest medium-term forecast in the IMF’s World Economic Outlook in over 30 years. The IMF said that in the short term, it expects global growth of 2.8% for 2023 and 3% in 2024 but that its baseline forecast “assumes that the recent financial sector stresses are contained.” In its latest economic outlook report, the fund said, “The world economy is not currently expected to return over the medium term to the rates of growth that prevailed before the pandemic.”

4. China’s much-publicized “Belt and Road” initiative, announced in 2013 and called the “Project of the Century” by President Xi Jinping, is falling under heavy scrutiny and appears to be losing its momentum in multiple countries around the globe. According to Bradley Parks, executive director of AidData, a research group out of William and Mary College in Virginia, “Beijing went on a lending spree and issued thousands of loans worth nearly a trillion [dollars] for big-ticket infrastructure projects spread across 150 countries. Now, many borrowers are having difficulty repaying their infrastructure project debts to Beijing.” Parks continued, saying “In 2010, only 5% of China’s overseas lending portfolio supported borrowers in financial distress. Today, that figure stands at 60%.” As Beijing calls due on the loans that it made to these countries, in many cases, they are acquiring some of the very projects they lent money to build. In Sri Lanka, which defaulted on its debt payment for the first time in 2022, China gained control of one of its strategic ports.

5. During the week ending April 8, the advance figure for seasonally adjusted initial claims for unemployment was 239,000, a decrease of 11,000 from the previous week’s unrevised level. The 4-week moving average of claims was 240,000, an increase of 2,250 from the previous week’s unrevised average.

6. Sustained inflation and high-interest rates triggered a 1% drop in retail sales in March from February as American consumers continued to curtail their spending at retail stores and restaurants. The drop was sharper than February’s 0.2% decline and lower sales for autos, electronics, and home and garden stores were the primary drivers for the steeper drop.

7. The European Union announced this week that it intends to apply more sanctions against Russia for its continued invasion of Ukraine. Mairead McGuinness, EU commissioner for financial stability, financial services and capital markets union said “Europe has rolled out 10 packages of sanctions. We will have another package.” McGuinness also noted that Russia was attempting to evade current sanctions and that Brussels would seek to ensure that the new package would be implemented “effectively” so that it would be harder for individuals and Russian entities to evade them. McGuinness said “Our information is that the sanctions are working, and we will be doing more, but we need to look at full implementation. What Russia is being deprived of is both the finance and the technologies to reinvent their war machine, and they are having problems on the battlefield.” She also noted, “We have to make sure that they don’t find ways around our sanctions, and I make the point repeatedly, that the deeper our sanctions, the more impactful they are, the more Russia will look for those ways, whether it’s other countries, or different bank accounts, to circumvent [them].”

8. On Wednesday, the Biden administration in the U.S. announced fresh sanctions as well, aimed at the financial network that has been linked to Russian billionaire and business tycoon Alisher Usmanov, in its own attempt to crack down on Russia’s ongoing evasion of sanctions. Brian Nelson, undersecretary of the Treasury for terrorism and financial intelligence said “As the Kremlin seeks ways around the expansive multilateral sanctions and export controls imposed on Russia for its war against Ukraine, the United States and our allies and partners will continue to disrupt evasion schemes that support Putin on the battlefield. Today’s action underscores our dedication to implementing the G7 commitment to impose severe costs on third-country actors who support Russia’s war.” The Treasury’s Office of Foreign Assets Control announced it would sanction twenty-five individuals and twenty-nine entities across twenty different jurisdictions for working with Usmanov.

9. The International Energy Agency (IEA) said in its latest monthly oil market report that the surprise OPEC+ output cuts announced last week as a “precautionary move” will most likely mean bad news for consumers at a time of heightened economic uncertainty. The IEA said “Consumers confronted by inflated prices for basic necessities will now have to spread their budgets even more thinly. This augurs badly for the economic recovery and growth.” Oil indexes managed to post a fourth straight weekly gain for the sector as the IEA projected record global demand this year as China’s consumption levels returned to normal. Brent crude futures settled at $86.31 per barrel, up 0.3%, while West Texas Intermediate (WTI) settled at $82.52 per barrel, up 0.4% for the week.

10. EUR/USD continued to climb this week, moving steadfastly through 1.10 and moving higher right through into Friday when it touched 1.1075 before drifting lower once more. The euro closed out the week back under 1.10. Ongoing banking fears appear to be the primary factor behind moves in both the euro and European stock markets.
11. USD/JPY continued drifting lower this week on an overall basis. The index began the week dipping lower, then quickly climbed back above opening levels. On Wednesday, the USD/JPY moved from its highs for the week, taking a steep dive back to 132.90, where it stabilized and moved mostly sideways into Thursday. Early Thursday the index took another steep dive, falling to 132.15 and hovering around that level into Friday. The USD/JPY saw a sudden reversal on Friday, shooting back to 133.77 just prior to market close.

Global concerns continue to grow over the state of the world’s linked economies. In Europe, the new concern is that the recent collapse in the banking sector could trigger a similar collapse in the commercial real estate market as bank runs trigger a pullback in the financial sector’s willingness to lend. In the U.S., the latest minute from the Federal Reserve’s Financial Open Market Committee meeting shows that the central bank is highly concerned that the same banking collapse could be the trigger for the U.S. economy to slide into a full-blown recession later in 2023. The banking collapse, along with sustained inflation and higher global interest rates, has also caused fallout for China’s so-called “Belt and Road” initiative, which was an ambitious plan launched in 2013 to build infrastructure across Eurasia and beyond to foster trade links with China. The global pandemic and the accompanying economic slowdown that affected every country in the world appeared to have thrown the success of that initiative into doubt. Many of the countries to that China lent money for these infrastructure projects now appear to be struggling to pay that money back. The result appears to be that China has begun scaling back its infrastructure lending and has engaged in “emergency rescue lending” instead.

In a conference call this week, JPMorgan Chase CEO Jamie Dimon warned investors and businesses that they should plan for interest rates to remain higher for longer than analysts currently expect. Dimon said “People need to be prepared for the potential of higher rates for longer. If and when that happens, it will undress problems in the economy for those who are too exposed to floating rates, for those who are too exposed to refi risk. Those exposures will be in multiple parts of the economy.” Dimon’s use of the term “refi” referred to loans that reset at market rates when those rates change. Dimon, whose bank advises other regional banks, said that while he expects those regional banks to post “pretty good numbers” when earnings are released next week, there is a risk of “additional bank failures.”

Economic, geopolitical, and environmental uncertainty remains at the forefront of concerns for the near term. The ongoing trouble in the banking sector could bleed over into other sectors, as evidenced by Europe’s concern over its commercial real estate woes. The U.S. and China continue to be at increasing odds with each other. The latest rounds of U.S. sanctions against entities allegedly aiding Russia in its own attempts to evade sanctions targeted some additional Chinese companies. On Saturday, Beijing chastised the U.S. for those sanctions, calling them an illegal move that endangers global supply chains. The new sanctions targeted five firms that are based in mainland China and Hong Kong on its “entity list” which bars them from trading with any U.S. firms without gaining a special license that is, for all intents and purposes, nearly impossible to obtain. A statement from China’s Commerce Ministry said that the actions taken by the U.S. have “no basis in international law and are not authorized by the United Nations Security Council. It is a typical unilateral sanction and a form of ‘long-arm jurisdiction’ which seriously damages the legitimate rights and interests of enterprises and affects the security and stability of the global supply chain. China firmly opposes this. The U.S. should immediately correct its wrongdoing and stop its unreasonable suppression of Chinese companies. China will resolutely safeguard the legitimate rights and interests of Chinese companies.”

In the U.S., yet another weather-related disaster saw massive flooding in South Florida as a historic storm dumped record amounts of rainfall in a relatively short time frame. As investors continue to watch these economic, geopolitical, and environmental events play out, they remain dedicated to seeking out ways to ensure that their investment portfolios are diversified to aid in protecting them from shocks to any single market sector. Many of these investors continue to add physical precious metals to their portfolios as part of those diversification plans, noting their history of maintaining value during such times of uncertainty. 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.

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