The Precious Metals Week in Review – April 21st, 2023

1. The fragmentation of the world’s economy into rival blocs led by the United States and China threatens to destabilize global commerce, increase inflation, and weaken growth, Christine Lagarde, the president of the European Central Bank warned Monday. Costs tend to mount, she said, as countries stop or reduce trading with rivals and seek supplies at home or from allied countries. She added it can be difficult to sever ties: Europe, for example, relies on China for 98% of its rare earth minerals, which are used in cellphones and computers hard drives, among other products. If world supply chains were to split along geopolitical lines, consumer prices could rise 5% in the near term and 1% in the long run. Lagarde also said the United States could not take for granted the US dollar’s continued role as the go-to currency for world trade, though for now, it remains unchallenged. China, Russia, and other countries are seeking to wean themselves off dependence on the US, which has sought to use its dominance to impose sanctions, most notably on Russia after its invasion of Ukraine last year. A more splintered and less efficient world economy will make it harder for Central Banks to contain inflation.

2. China will be the top contributor to global growth over the next five years, with its share set to be double that of the US, according to the International Monetary Fund. The nation’s slice of global gross domestic product expansion is expected to represent 22.6% of total world growth through 2028, according to calculations using data the fund released in its World Economic Outlook released last week. India follows at 12.9%, while the US will contribute 11.3%. The emergency lender sees the world economy expanding about 3% over the next half-decade as higher interest rates bite. The outlook over the next five years is the weakest in more than three decades, with the fund urging nations to avoid economic fragmentation caused by geopolitical tension and take steps to bolster productivity. In total, 75% of global growth is expected to be concentrated in twenty countries and over half in the top four: China, India, the US, and Indonesia. While Group of Seven countries will make up a smaller share, Germany, Japan, the United Kingdom, and France are seen among the top ten contributors.

3. Stocks wavered early Monday as the possibility of further Federal Reserve policy tightening lifted Treasury yields and investors stayed on the sidelines amid bank earnings. The S&P 500 was little changed. Two-year rates climbed to around 4.1% as investors scaled back expectations for rate cuts later in the year. New York state manufacturing activity unexpectedly expanded in April for the first time in five months as new orders and shipments snapped back. Charles Schwab fell after the firm said deposits continued to erode in the first quarter and that it was halting share repurchases amid the worst US banking crisis since 2008. State Street Corp. dropped as it reported clients retreated from its investment products. “The current season’s earnings profile is rather opaque,” said Peter Kinsella, head of FX strategy at Swiss asset manager UBP. “The banks last week did better than expected, but we have to see what the reporting season will be like from everyone else. But the S&P is expensive at current levels, so you have to ask yourself if there is really much material upside from here.”

4. For the first time in 10 months, gold flowed into ETF’s in March with global ETF’s recording net inflows of 32 tons. This represented an increase of about $1.9 billion. The price of gold was up 9% in March, fueled by demand as the financial crisis unfolded. Overall, global gold ETF total assets under management rose by 10% to $220 billion by the end of March. Inflows of gold into ETF’s are significant in their effect on the world gold market, pushing overall demand higher. However, there is a difference between investing in gold-backed ETF’s and buying physical gold. Many ETF’s serve as a proxy to the gold market with some questions arising as to their actual physical gold holdings. As a rule of thumb, gold ETF’s held by the issuer are traded on the market like stocks. They allow investors to play gold without owning full ounces of gold. As there are some reasons to invest in ETF’s, they are not a substitute for owning physical metal. In an overall investment strategy, it is recommended buying gold bullion first. When considering gold-backed ETF’s, you should always keep in mind that for the most part, you don’t actually own the gold. Buying the most common ETF’s does not entitle you to any actual amount of the precious metal.

5. The European Central Bank is set to deliver three quarter-point increases in interest rates in May, June, and July before ending the most aggressive bout of monetary tightening in its history, economists say. That would take the deposit rate to 3.75%, where it would stay through the rest of the year, according to the April 5-13 survey. The results show economist expectations are broadly in line with those of investors, who’ve pared back bets on the peak of this cycle of hikes following the banking collapses in the US and Switzerland. Speaking last week on the sidelines of the International Monetary Fund’s Meetings, ECB officials were almost unanimous in calling for borrowing costs to be raised further on May 4, though the size of that move remains up for debate. Euro-area inflation, while slowing considerably this year — is still more than three times the ECB’s 2% target and a core measure that strips out volatile elements like food and energy is hitting fresh records every month. Underlying inflation might have peaked in regard to quarterly averages but will still be at 5.5% this quarter and is set to surpass the headline number in the second half of this year, the survey shows.

6. Only 10 electric and plug-in hybrid vehicles will qualify for $7,500 federal tax credits in the US after stricter battery-sourcing rules take effect and render most plug-in models ineligible. General Motors, Tesla, and Ford Motor Co. all have at least one EV that will qualify, while Ford and Stellantis NV each have one eligible plug-in hybrid model. No other automakers will have a vehicle for sale that fully meets the criteria that were finalized last month and will kick in on Tuesday, according to the Treasury Department. The requirements included in the Democrats’ marquee climate law, the Inflation Reduction Act, will roughly halve the number of vehicles that can receive the full tax credit relative to how many were eligible during the first few months of the year when Treasury was finalizing its guidance for meeting the rules. The list released Monday makes official what many manufacturers feared: that consumers will miss out on federal incentives for their EVs because not enough of their battery components or raw materials are sourced from North America or countries with US free-trade agreements. Volkswagen, Hyundai, Nissan, BMW, Volvo, and Rivian Automotive each have had vehicles eligible for at least partial credits early this year that no longer will be eligible as of Tuesday.

7. Federal Reserve Governor Michelle Bowman says that the risks of creating a US digital dollar for use by everyday Americans might outweigh the benefits. “It is difficult to imagine a world where the tradeoffs between benefits and unintended consequences could justify a direct access CBDC for uses beyond interbank and wholesale transactions,” Bowman said in a speech. Bowman cited several possible risks of a retail-focused central bank digital currency, or CBDC, including possible impacts on consumer privacy and disruptions to traditional banking if it ends up draining deposits from that sector. These are concerns that have been mirrored by some lawmakers and bank lobbyists. The Fed would need to address those issues if it decides to move forward with such a CBDC, and it wouldn’t push forward without Congress’ approval, she said. Meanwhile, there could be some promise for a “wholesale” CBDC to settle certain financial market transactions, such as interbank transfers, and to process international payments — transactions that are currently slow and resource-intensive. “There are potential use cases in the context of certain interbank transactions in wholesale markets, where some transactions are slow and heavily resource-intensive to clear and settle,” Bowman said. “Participants in the wholesale financial markets have been considering innovative ways to address these frictions with newer technologies such as distributed ledger technology in which shared information across counterparties could be leveraged to increase speed and reduce back-office costs to reconcile transactions before they settle.”

8. Bank of England Deputy Governor Jon Cunliffe said regulators may need to impose a limit on using so-called stablecoins for payments as policymakers try to balance the need for innovation with its accompanying concerns. Stablecoins, which are currently issued by non-bank businesses, are pegged to the value of an asset. They are designed to maintain a stable value, unlike cryptocurrencies such as bitcoin, while using ledger technology to record and transfer ownership. Cunliffe raised the prospect that rapid innovation in payment systems could bring new risks for customers and financial markets as a whole. “While, from a public policy perspective, we want competition and innovation in payments we need to guard against rapid, disruptive change that does not allow the financial system time to adjust and could therefore threaten financial stability.” Regulators would need to decide “whether there should be limits, initially at any rate, on stablecoins used for payments.” Cunliffe noted that “so far their use has been confined to facilitating trading and other transactions in the world of crypto assets, but that there were proposals to use them for other, broader payment purposes. Stablecoins offer the possibility of greater efficiency and functionality in payments,” he said. But they currently do not fit into any regulatory framework, unlike the existing payment systems and money issued by commercial banks. This would mean that, initially at least, stablecoin deposits would not be protected in case of failure by the industry-funded insurance scheme which protects deposits up to £85,000.

9. In the week ending April 15, the advance figure for seasonally adjusted initial claims was 245,000, an increase of 5,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 239,000 to 240,000. The 4-week moving average was 239,750, a decrease of 500 from the previous week’s revised average. The previous week’s average was revised up by 250 from 240,000 to 240,250.

10. Oil futures headed higher on Friday but remain on track to post a weekly loss for the first time in five weeks as worries about the economic outlook stoked demand worries. West Texas Intermediate crude for June delivery climbed by 73 cents, or 0.09% to $78.10 a barrel leaving the front-month contract for the US benchmark on track for a 5.3% weekly fall. June Brent crude was up 69 cents, or 0.9% at $81.79 a barrel, leaving it down 5.2% for the week.

11. The Euro initially dipped during the trading week but has found enough support near the 1.09 level to turn things around. By doing so, the market looks as if it is trying to find reasons to go much higher, and of course, it is paying close attention to the 1.10 level. Ultimately, that is going to be a nice barrier, but if we do break above that level, then it’s likely that we go looking all the way toward the 1.15 level, which would take some work at this point.

12. The USD/JPY pair attracts some dip-buying in the vicinity of the 133.55 regions during the early North American session and recovers its early lost ground to the weekly low. Spot prices touch a fresh daily peak, around the 134.30 regions, and for now, seem to have stalled this week’s retracement slide from the highest level since mid-March. The US Dollar (USD) jumps back closer to the weekly high following the release of the US PMI prints, which, in turn, is seen as a key factor pushing the USD/JPY pair higher.

US workers are starting to see pay gains run faster than inflation, amplifying their purchasing power and giving the Federal Reserve a reason to raise interest rates again next month. Median weekly earnings of full-time wage and salary workers were 6.1% higher in the first quarter of 2023 compared to the same period a year earlier, the Bureau of Labor Statistics said in a report Tuesday. Inflation during that time ran at 5.8%, the BLS said. The data signify that Americans may be finally starting to stretch their dollars further, as wage gains have generally lagged behind inflation over the past two years. Price pressures have been cooling somewhat, but companies are still raising pay to attract and retain a scarce supply of workers. While that may bode well for consumer spending, it’s potentially worrisome for the Fed as they try to curb demand across the economy to tame price pressures. That may incline policymakers to lean toward another hike at their May meeting.

China’s production of key electronics declined so far this year despite a bullish rebound in the overall economy, showing the unevenness of the country’s recovery. The output of semiconductors fell nearly 15% in the first quarter from the same period last year, according to data released by the National Bureau of Statistics on Tuesday. Smartphone production shrank 13.8% in the same period, as local brands like Oppo, Vivo, and Xiaomi Corp. struggled to shake off a sales malaise that’s affected Android handsets for over a year. In addition to that domestic sales slowdown, trade tensions between Washington and Beijing are increasingly pushing electronics brands such as Apple to seek production locations outside of China. The Biden administration’s curbs on trade with China’s semiconductor industry have also put a cap on Beijing’s chip ambitions, as local manufacturers are no longer able to access some technologies to fabricate cutting-edge silicon. The output of microcomputers such as PCs slumped the most among the key electronics product classes disclosed in the report, and the downturn in electronics output dragged on the growth of China’s total industrial output, which climbed 3.9% in March. Gross domestic product expanded 4.5% in the January-to-March period from a year earlier.

US business activity unexpectedly climbed this month to nearly a one-year high, bolstered by stronger services and manufacturing that threaten to reignite inflationary pressures. The S&P Global flash April composite purchasing managers index rose 1.2 points to 53.5 – the highest since May – the group reported Friday. Readings above 50 indicate expansion, and the gauge has now exceeded that threshold for three months after contracting through the back half of last year. “The upturn in demand has also been accompanied by a rekindling of price pressures,” Chris Williamson, a chief business economist at S&P Global Market Intelligence, said in a statement. “This increase helps explain why core inflation has proven stubbornly elevated at 5.6% and points to a possible upturn – or at least some stickiness – in consumer price inflation.” An uptick in inflation would reverse months of progress, even though price growth is still too fast. The Federal Reserve is expected to raise interest rates again next month, but officials are unsure as to how much further they’ll need to go. S&P Global’s measure of business activity at service providers rose to the highest in a year while manufacturing activity expanded for the first time since October. Firms in both sectors boosted employment by the most since July but still reported growing backlogs amid struggles to attract and keep skilled workers. Businesses remained upbeat about the outlook this month, with the degree of confidence in the year ahead improving to the second highest since May. Even so, optimism remains below average due to higher interest rates and inflationary pressures.

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.

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