The Precious Metals Week in Review – April 28th, 2023

1. Two key gauges showed persistent U.S. inflation pressures in recent months, buttressing the case for another Federal Reserve interest-rate hike next week. The personal consumption expenditures price index excluding food and energy, the Fed’s preferred measure of underlying inflation, rose 0.3% in March from the prior month and 4.6% from a year earlier, a Commerce Department report showed Friday. The Fed targets 2% based on a broader measure but views the core gauge as a better indicator of the trend. Meanwhile, the Labor Department’s measure of employment costs, also closely watched by the Fed, increased 1.2% in the first quarter from the previous period, exceeding forecasts. The price data, especially in conjunction with rising labor costs, reinforce forecasts that Fed policymakers will raise their benchmark interest rate another quarter percentage point at next week’s meeting. While annual inflation has peaked, the path back to the central bank’s 2% goal is proving bumpy.

2. Hedge funds are betting on higher Treasury yields in a market that’s divided over whether the U.S. economy can avoid recession and Federal Reserve interest-rate cuts. Recent positioning data suggests leveraged investors are about as confident as the central banks that a slump can be dodged even as the past year’s inflation-fighting policy tightening bites on activity. That group of investors boosted net shorts on 10-year Treasury futures to a record 1.29 million contracts as of April 18, data from the Commodity Futures Trading Commission show. It was the fifth straight week that net shorts had increased. “Hedge funds may be thinking that inflation will be stickier than many in the market are currently expecting,” said Damien McColough, head of fixed-income research at Westpac Banking in Sydney. “On the face of it, this big short doesn’t reflect the view that there will be a near-term recession.” Still, not everyone in the market is convinced. While swap markets show another quarter-point Fed hike in May is being priced as close-to-certain, and there’s even the marginal possibility of another one in June, they also indicate that the central bank will be cutting in earnest again by the end of the year on the back of a more painful economy. Also, while leveraged funds have been increasing their bearish wagers on 10-year Treasury futures, other asset managers have been going in the other direction and amping up their longs. With ongoing uncertainty about recession risks and what the Fed will do, it remains very much a two-way market as investors stake out positions on either side of the divide.

3. The startup world has had a tough year — plagued by mass layoffs, plummeting venture capital investment, and the chaotic collapse of Silicon Valley Bank. But many in tech believe that the worst is yet to come. Some venture-backed companies will be forced to raise new funding even if it means agreeing to a lower valuation than they once secured, a deal called a down round, dreaded by founders and investors alike. “We haven’t had a compression in values like this in more than 20 years. It’s an absolute bloodbath,” said Cameron Lester, global co-head of technology media and telecom investment banking at Jefferies, adding that companies that are able to raise money, even at a lower valuation, are the lucky ones. “What matters is you’re a survivor,” Lester said. Toward the end of 2022, down rounds hit near five-year highs, according to research firm Prequin. While many companies have cut costs and taken on debt to avoid raising money on unfavorable terms, those delay tactics have limits. More than 400 companies, one-third of all unicorn startups, those valued at $1 billion or more, haven’t raised new funding since 2021 according to PitchBook. That’s a long time for a company that isn’t yet turning a profit, coasting on the cash they brought in from previous funding rounds. Most venture-backed companies usually raise every year or two, and about 94% of tech unicorns are unprofitable. “Some of these companies remind me of Scottish nobility that haven’t raised money in seven generations,” said Mathias Schilling, co-founder of venture firm Headline. “They sit and drink champagne while it rains through the roof.”

4. Investors are starting to wake up to platinum’s value play as momentum drives the price to its highest level since the start of the year. Platinum prices are looking to end Wednesday above $1,100 an ounce, up more than 4% this week. Meanwhile, prices are up 20% year to date from last week. According to the World Platinum Investment Council, platinum is an attractive asset for investors looking for value in the precious metals sector. “Platinum remains under-owned but also still undervalued compared to gold and to its one-to-one substitute, palladium,” said Trevor Raymond, CEO of the WPIC. According to some analysts, while technical momentum is driving platinum prices, the market also has strong fundamentals, supporting what could be a sustainable rally in the precious metal. Analysts note that improving economic data in China came in stronger than expected, supporting robust platinum jewelry demand. At the same time, further power disruptions in South Africa continue to impact platinum production. “Even if producer ounces are not affected in the short-term (they have proven to manage load curtailment), it’s a supply/fundamental story that fits the bullish story, like anything in markets, it will matter when it does,” said Nicky Shiels, head of metals strategy at MKS PAMP. Platinum has struggled to attract sustainable investor interest in recent years because of a struggling auto sector. Platinum is primarily used in the auto sector and is a critical component in catalytic converters, which are used to reduce harmful emissions from gasoline and diesel-powered vehicles. However, analysts note that platinum is also coming into its own as part of the global green energy transition. It is used as a catalyst to separate water into oxygen and hydrogen; the hydrogen is then used as a power source. If gold prices are $2,500, platinum must at least move back above $1,200, he said. “Platinum, while a precious metal, is an important industrial metal and it checks a lot of boxes for some. It is one of those metals you should have in your portfolio because of its potential.”

5. With stagflation still running rampant in the U.S. and Europe the last thing anyone should potentially be worried about is a less than 1°C rise in global temperatures in the past 100 years. There is no concrete evidence of any significant climate crisis, and all the people who tell us a crisis is right around the corner to do so while raking in billions in funding dollars from governments and think-tank institutions with a vested interest in reinforcing the hysteria. In other words, there is no basis for exponential restrictions on “greenhouse gas” emissions. When the policies of the climate groups are examined with a clear head, it becomes obvious that saving the planet is not a primary concern. Rather, the purpose of the agenda is to increase power to government bureaucracies on a level not seen since the feudal empires of centuries past. One factor that consistently arises in the fight over climate change mandates is the increasing need for energy clashing with deliberate cuts to the means of production. Establishment elites want restricted energy access for the public, and they want people to pay more for each slice of the ever-shrinking pie. A perfect example of this dynamic is the widespread effort by such governments to shut down nuclear power plants, one of the cleanest forms of energy we have from the standpoint of carbon emissions. Germany, already in the midst of an energy shortfall due to the loss of natural gas supplies from Russia, has also just closed its last three operational nuclear power plants this past week, leaving the nation high and dry when it comes to easily accessible electricity. Alongside the closure of the nuclear plants, German electric utility E.ON increased its prices by as much as 45% starting June 1. Ironically, shortages last winter compelled the German government to increase coal-fired power plant operations, yet they are still shutting down clean energy nuclear plants to make way for so-called renewables. If climate change initiatives don’t seem to be making much sense these days, it’s because there is no logic behind them other than to create incremental chaos. The confusion over conflicting green policies makes way for notoriously inefficient wind and solar power farms that cannot sustain the existing population, but it also allows for a global political power grab on an unprecedented scale.

6. The region that produces North America’s cheapest power faces a threat that seemed impossible just a few years ago — running short of electricity. Quebec spent years working to convince U.S. states to buy its abundant clean energy, only to realize now that it won’t be able to produce enough electricity by harnessing the flow of moving water. That creates a puzzle for the Canadian province: build more dams that could reshape pristine rivers and slash swaths of forests, an environmentally damaging process that would boost hydropower supply, or temper economic policies that pin its prosperity on the resource. Quebec Premier Francois Legault has pitched the French-speaking province as the “green battery” of the northeastern region of North America, building on its reputation of supplying electricity to New England and New York for decades. “We sell cheap, reliable, and renewable energy,” said Hydro-Quebec’s Dave Rheaume, who oversees risk management. “However, it’s precious and now everybody wants to come and have access to it, but we don’t have the ability to infinitely replicate these kinds of generation assets.” Hydropower is the top global source of renewable energy and supplies one-sixth of the world’s electricity, according to International Energy Agency estimates. Dams on rivers are often used to create hydroelectricity, with flowing water turning turbines to generate energy in power plants. The capacity of the resource is expected to grow this decade, though tough environmental requirements and challenging economics are slowing project developments in China, Latin America, and Europe.

7. In the week ending April 22, the advance figure for seasonally adjusted initial claims was 230,000, a decrease of 16,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 245,000 to 246,000. The 4-week moving average was 236,000, a decrease of 4,000 from the previous week’s revised average. The previous week’s average was revised up by 250 from 239,750 to 240,000.

8. Oil prices were on course early on Friday to post a second consecutive weekly loss as concerns about the economy trumped a larger-than-expected draw in U.S. commercial oil stocks. Brent Crude prices fell this week below the $80 per barrel threshold as negative sentiment in the market prevailed due to concerns about a recession with rising interest rates in major developed economies. The Fed, the European Central Bank (ECB), and the Bank of England are all expected to continue raising the key interest rates at their upcoming policy meetings. The Fed’s decision will be announced next week after the May 2-3 rate-setting meeting. Early on Friday, WTI was trading a bit above $75 and Brent at around $79 a barrel. Oil has now fallen back to the levels from before the surprise OPEC+ announcement of additional cuts in early April.

9. The Euro has spent most of the week trying to rally, but it struggled at the 200-Week EMA, that’s typically a very important indicator, so it will be interesting to see how this plays out. After bottoming out in the proximity of 1.0960, EUR/USD manages to regain some composure and now looks to regain the key 1.1000 barrier and beyond at the end of the week. A fresh bout of oxygen seems to lift EUR/USD back to the 1.1000 neighborhood, as the Greenback gives aways some gains and investors continue to digest disappointing results from the EMU and German docket on Friday. The U.S. dollar, in the meantime, recedes from earlier tops in response to another sign of further disinflation in the U.S. economy. It’s worth noting that Mayday is Monday, so it will more likely than not be a very quiet session but at the end of the week, we should have quite a bit of information coming out of the Federal Reserve, which will have a lot to do with where we go next anyway.

10. The Japanese yen fell to a nine-year low against the euro on Friday after the Bank of Japan left its ultra-easy monetary policy unchanged. However, the Central Bank removed a pledge to keep interest rates at “current or lower levels” and said it would “conduct a broad-perspective review of monetary policy.” The yen fell sharply also against the U.S. dollar, down 1.3% to 135.787, its lowest since March 10.

U.S. economic growth slowed in the first quarter by more than expected as tepid business investment and a pullback in inventories tempered a pickup in consumer spending. Gross domestic product rose at a 1.1% annualized rate on the back of the strongest consumer spending in nearly two years, the Commerce Department’s initial estimate showed Thursday. The inflation and consumer spending figures are likely to keep the Fed on track to raise interest rates by a quarter percentage point next week. U.S. consumer confidence dropped this month to the lowest since July on more pessimistic views about the economic outlook, even as current conditions improved. The Conference Board’s index decreased in April to 101.3 from 104 in March, data out Tuesday showed. The median forecast in a survey of economists called for a reading of 104. A measure of expectations, which reflects consumers’ six-month outlook fell to 68.1, also the lowest since July. However, the group’s gauge of current conditions advanced to 151.1. “Consumers became more pessimistic about the outlook for both business conditions and labor markets,” said Ataman Ozyildirim, senior director of economics at the Conference Board. “While consumers’ relatively favorable assessment of the current business environment improved somewhat in April, their expectations fell and remain below the level which often signals a recession looming in the short term.” The figures suggest consumers are turning a sour on the economy amid expectations that the labor market will soon begin to soften. Layoffs are swirling and companies are posting fewer job openings, and those trends will accelerate in the event of a recession.

Canadians are growing more optimistic as the outlook for real estate steadily improves and the economy grinds ahead with few signs of an imminent recession. The Nanos Canadian Confidence Index, a measure of sentiment based on weekly polling, rose to the highest level since June. The index was at 50.4 last week, the fifth straight increase. It began to rise sharply around the same time as the Bank of Canada officially paused interest rate hikes, in early March. A Nanos score of 50 indicates that positive and negative views are about equal. The index’s lowest point in the past year was 42 in October. The primary reason for the gains is the view that home prices have hit bottom: 75% of respondents said they expect prices will either rise or stay the same in the next six months. What’s more, the Bank of Canada made a conditional promise in January to hold its benchmark rate at 4.5% if the economic outlook and inflation unwind in line with its forecasts. And a dearth of housing supply has led analysts to suggest housing will perk up in the second half of 2023, a sentiment shared by the central bank in its latest monetary policy report.

U.S. homebuyers can’t catch a break. Sharply higher mortgage rates made houses more expensive and weakened demand without doing much to lower prices in most of the U.S. The supply of existing homes shrunk as owners hung on to their low-rate mortgages, slowing turnover and worsening the supply crunch. Now as homebuilders whittle down their inventories, they’re getting ready to phase out the buyer incentives they’ve been offering to counter higher mortgage rates. Buyers have been holding out hope that they’ll eventually get some relief when mortgage rates start to fall. Sorry, but nope. What homebuyers need is more supply, without that, lower mortgage rates will just create more demand and push up prices for whatever homes are available. The affordability equation won’t change much.

Steve Forbes, as mainstream an investor and businessman as you will find in the nation, is openly calling for a return to the gold standard. Forbes claims gold’s fair value is closer to $3,000 than its current price, and U.S. states aren’t waiting for a national gold standard, they’re busy authorizing their own. Remember the U.S. Constitution? If you do, it is difficult to miss this passage:

No State shall enter into any Treaty, Alliance, or Confederation; grant Letters of Marque and Reprisal; coin Money; emit Bills of Credit; make any Thing but gold and silver Coin a Tender in Payment of Debts; pass any Bill of Attainder, ex post facto Law, or Law impairing the Obligation of Contracts, or grant any Title of Nobility.

States are slowly but surely remembering that, in order to be called states under the Constitution, they’re meant to use gold and silver as legal tender. Some say that a digital dollar might be rolled out as early as July. Among its many problems, Robert Wright, a Senior Research Fellow at the American Institute for Economic Research, notes that a CBDC might not even qualify as money under the Constitution. As funny money turns into crazy money, it’s good to know that efforts are being made in the opposite direction. The Sound Money Defense League has been a key mover in getting sales tax on gold and silver eliminated from 43 states, but that’s just the start. Missouri’s SB-100 bill would give citizens the right to use gold and silver as legal tender. Missouri is one of 23 states with similar bills, 10 of which have been introduced this year alone. The bill hasn’t actually mentioned the U.S. dollar past saying CBDCs shouldn’t be enforced, and it’s pretty clear why. Any return to sound money might as well be interpreted as an attack on the U.S. dollar, so making gold and silver seem like an option next to the greenback apparently gives the bill a greater chance of success. If nothing else, the bill could rescue us from what looks like a public pension crisis.

Exciting times for gold bullion, and less so for the U.S. dollar. Forbes accurately points out that the 1775-1900 period put the U.S. on the map as an economic superpower, furthermore, the indisputable claim that inflation was basically nonexistent. The gold-tethered U.S. dollar was so well-regarded that we’re still coasting on it. But the numbers can’t be ignored. Forbes notes that even in the 1950s and 1960s, for example, the average annual growth rate in the U.S. was 4.2%, while these days it clocks in at around 2.7%. Yet it’s known that the creation of the Fed in 1913 paved the way for inflation even with the gold standard around. And the 1971 version of the gold standard, which didn’t allow U.S. citizens to swap their paper money for “cold hard cash,” was already a watered-down version of the pre-1900 gold standard, where every dollar bill was redeemable on demand for gold or silver. It stands to reason, then, that the Fed’s function would have to change in some capacity in order for the gold standard to work, to begin with.

Given that central bank’s pretty much-introduced inflation to global economies, they aren’t likely to spearhead a sound money movement. Unfortunately for those who don’t own gold, it seems that the solution will continue being a tried and tested one: print and print more. Can our nation ever get back to a place where the quality of money doesn’t change from year to year? Not without some pretty big changes. Meanwhile, things will continue as they have until the next financial crisis forces us to start asking hard questions…

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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