The Precious Metals Week in Review – May 5th, 2023

1. JPMorgan Chase agreed to acquire First Republic Bank in a government-led deal for the failed lender, putting to rest one of the biggest troubled banks remaining after turmoil engulfed the industry in March. The transaction, announced in the early morning hours Monday after First Republic Bank was seized by regulators, makes the biggest U.S. bank even larger while minimizing the damage to the Federal Deposit Insurance Corp.’s guarantee fund. JPMorgan agreed to the takeover after private rescue efforts did not fill a hole in the troubled lender’s balance sheet and customers yanked their deposits. First Republic was the second-biggest bank failure in U.S. history, and the fourth regional lender to collapse since early March. “This is getting near the end of it, and hopefully this helps stabilize everything,” JPMorgan Chief Executive Officer Jamie Dimon said on a call with journalists Monday. Regional banks that reported first-quarter results in recent weeks “actually had some pretty good results,” the CEO said. “The American banking system is extraordinarily sound.”

2. At first blush, stock bulls on Wall Street have history on their side if the Federal Reserve’s aggressive policy-tightening campaign is ending. Over eight past monetary-tightening cycles, the S&P 500 ended up higher by an average of 13% a year after the last interest-rate increase, per Strategas Securities. Meanwhile, the famous American consumer is still largely alive and well, first-quarter corporate earnings are reviving Big Tech and supply bottlenecks are easing. All that raises the possibility of a fresh bull cycle ahead akin to the mid-90s. Yet money managers aren’t jumping in — with another $2.7 billion pulled from U.S. equity funds in the week through April 26. The fear is higher borrowing costs risk stoking continued turmoil in the banking sector while curtailing credit in crucial corners of the U.S. economy. History, meanwhile, provides cautionary tales. In the 1970s and again during the dot-com bubble, an overdose of monetary medicine, among other things, hurt the economy. “Timing the market is risky,” said Tony Roth at Wilmington Trust Investment Advisors, who predicts the S&P 500 will be range-bound for the remainder of the year and could drop as low as 3,600 as economic conditions worsen. “Once we can see through inflation, to when the Fed starts to cut rates, then we’ll be in the next cycle, and equities will be able to thrive,” he said. “But that is not going to happen, by our estimation, until next year.” History has shown that buying stocks at the end of a hiking cycle has proven to be a winning strategy in relatively low-inflationary environments like in the 1990s. But in the wake of inflationary pressures in the 1970s and beyond, stocks fell in the three months after every last hike, according to Bank of America Corp. That’s one reason Michael Hartnett, BofA investment strategist, has called for investors to “sell the last rate hike.” He expects that the S&P 500’s rally will be thwarted by falling profits and growing threats of a recession.

3. Global labor markets are poised for a new era of turbulence as technologies like artificial intelligence accelerate the decline of clerical work, while simultaneously increasing demand for technology and cybersecurity specialists. Over the next five years, nearly a quarter of all jobs will change because of AI, digitization, and other economic developments like the green energy transition and supply chain re-shoring, according to a report published by the World Economic Forum. While the study expects AI to result in “significant labor-market disruption,” the net impact of most technologies will be positive over the next five years as big data analytics, management technologies, and cybersecurity become the biggest drivers of employment growth. Some 75% of surveyed companies said they expect to adopt AI technologies over the next five years, which they predict will eliminate up to 26 million jobs in record-keeping and administrative positions, think cashiers, ticket clerks, data entry, and accounting. The WEF study surveyed over 800 companies that collectively employ 11.3 million workers across 45 economies worldwide.

4. A Canadian startup has developed an AI-enabled crop-spraying drone that reduces chemical use by up to 90%. Fitted with an artificial intelligence system, the drones are designed by local startup Precision AI to spot, identify and kill the weeds without drenching the entire crop in chemicals. For decades, big-acre crops like corn and wheat have been treated by spraying tractors that would move across vast farmlands, unleashing waterfalls of herbicide from long arms stretched above the crops, all to zap weeds that are often tiny and scattered about. Precision AI is among a handful of companies turning to advanced technology to address the problem of chemical overuse in agriculture. The company uses images of 15,000 plant species to train computer algorithms to distinguish staple crops (think corn, wheat, and soybeans) from unwanted weeds. The drone’s camera can “see” anything bigger than half a sesame seed and its AI identifies weeds with 96% accuracy, spraying the intended target alone.

5. China is putting the yuan front and center in its fight back against the U.S.’s unique influence over global money. President Xi Jinping’s government has been busy striking deals over the past year to expand the ways in which the currency is used, with new agreements linked to the renminbi stretching from Russia and Saudi Arabia to Brazil and even France. While the U.S. remains the world’s clear financial hegemon, these moves are helping China to carve out a bigger place for itself in the international financial system. They come at a time when geopolitical strains are growing, and global commerce is becoming an ever-more-active battleground. Hard-hitting sanctions on Russia have revealed a new willingness by the U.S. to weaponize the dollar. Together, that’s done more to promote China’s yuan over the past year than Xi’s government achieved in the preceding decade. The nation is working to demonstrate “that there’s a world outside of the U.S. and the Western world,” said Adrian Zuercher, head of global asset allocation for UBS Global Wealth Management’s office in Hong Kong. “You’re sending a very strong signal to the U.S. by basically saying we don’t need you and we don’t need your U.S. dollar.” That message is resonating in some parts of the world. Unease with the dominance of the U.S. and the greenback is pushing some countries and companies to diversify away from America and Europe.

6. Stablecoins are already providing access to U.S. dollars for many in the developing world and distressed economies, but they could become a regular tool for payments and transactions in the United States in the future, according to Nevin Freeman, co-founder of stablecoin platform Reserve. “I see stablecoins as really the natural evolution of crypto technology into ordinary commerce and finance,” Freeman said. He recently told news reporters that while stablecoins are the foundation of the crypto ecosystem, he already sees stablecoins being adopted as a stable alternative currency by people with no interest in crypto per se. “People for the most part use stablecoins as part of speculative trading activities these days, but we do start to see stablecoins being used more and more for ordinary transactions and savings in economies where access to U.S. dollars is attractive and not necessarily easy to get,” he said. He said that when he talks to people in the United States about cryptocurrency and stablecoins, nobody is interested in using them as a regular form of payment, but in economies that have undergone hyperinflation or have other limitations such as capital controls, stablecoins represent a way to access U.S. dollars. “It’s not really the case that we come across a whole lot of people who are especially excited to use crypto as money,” he said. “But we do come across a lot of people who are especially excited to use the U.S. dollar as their currency of choice, and stablecoins often present a novel way to do that. It’s really the desire for dollars that is driving the usage of stablecoins in economies that have currency issues.”

7. Applications for U.S. unemployment benefits rose by the most in six weeks while continuing claims fell, flagging some softening in a labor market that remains relatively resilient. Initial unemployment claims rose by 13,000 to 242,000 in the week ended April 29, Labor Department data showed Thursday. The median forecast in a Bloomberg survey of economists was for 240,000 applications. Continuing claims, which include people who have received unemployment benefits for a week or more and are a good indicator of how hard it is for people to find work after losing their jobs, fell by 38,000 to 1.81 million in the week ended April 22. That marked the biggest drop since July. Even as the labor market starts showing some weakness, it’s still cooling at a much slower pace than other economic indicators in the wake of an aggressive tightening campaign by the Federal Reserve.

8. Oil prices held steady in early trading on Friday but were set for a third straight week of losses after markets witnessed dramatic drops on fears of a weakening U.S. economy and slowing Chinese demand. Brent crude rose 14 cents, or 0.2%, to $72.64 a barrel, while U.S. West Texas Intermediate was up 17 cents, or 0.3%, at $68.73 a barrel after four straight days of losses. For the week, Brent was set to close down 8.7%, while WTI was set to close 10.5% lower.

9. The EUR/USD pair ends the week with modest losses around the 1.1000 figure after flirting with the 1.1100 level for a second consecutive week. Lots of water ran under the bridge this week, and generally speaking, the U.S. Dollar remained on the back foot, gaining traction on Friday, while the Euro was the one single major currency that could not take advantage of it.

10. The USD/JPY rises after dropping to a weekly low of 133.50, advancing 0.42%, spurred by buyers stepping in at around a solid technical support level. An upbeat April Nonfarm Payrolls report also lifted the US Dollar (USD) vs. the Japanese Yen (JPY) safety. At the time of writing, the USD/JPY is trading at 134.81 after dipping to a low of 133.88.

The speed of disruption brought on by a worldwide rush into artificial intelligence was on full display this week, sending shares of education technology company Chegg Inc. plunging, prompting IBM to halt some hiring, and prompting a chatbot ban at Samsung Electronics Co. Chegg shares plunged more than 40% in early trading on Tuesday after the company said OpenAI’s ChatGPT is threatening the growth of its homework-help services. Samsung said this week it would ban employees from using generative AI tools such as ChatGPT, according to a memo that was confirmed by the company. The company is concerned that data sent to AI platforms can be stored on external servers, making it difficult to delete and putting it at risk of being disclosed to other users. Samsung joins a number of Wall Street banks including JPMorgan Chase, Bank of America, and Citigroup, which had also banned or restricted the technology. Geoffrey Hinton, one of the pioneers of the “neural networks” that are the foundation of today’s generative AI systems, said this week that he’d quit Google after a decade so that he could speak freely about what he sees as the dangers around its rapid rollout. In March, more than 1,100 people in the AI industry signed a petition calling for a six-month break from training AI systems more powerful than the latest iteration behind ChatGPT in order to allow for the development of shared safety protocols. The signatories included Elon Musk, University of California Berkeley computer science professor Stuart Russell, and Apple Inc. co-founder Steve Wozniak.

It’s starting to look, smell and feel like a sustainable bull market in the precious metals market may be unfolding. For the first quarter, gold rose 8.2% and silver was basically flat for the quarter but rose 15.6% in March. The mining stocks, generically using the GDX ETF (Exchange Traded Fund) as a proxy, rose 12.2%. Several fundamental factors underlie the current performance of the sector, not the least of which is the continued massive accumulation of physical gold by non-western Central Banks. Eastern hemisphere Central Banks, including the CBs in countries that make up the BRICs alliance (Brazil, Russia, India, China) hoovered physical gold bars at a record pace in 2022 going back to when the records began in the 1950s. The pace of buying continued in Q1 2023 per a recent report from the World Gold Council.

It would appear that the accumulation of gold reserves is part of a plan by the non-western Government geostrategic and economic alliances to reincorporate gold into the monetary system by using gold to back a new reserve currency that will be an alternative to the use of the dollar as the only reserve currency. As significant, if not more significant, after a recent trip by China’s Xi Jinping to Saudi Arabia, where he was greeted by the Crown Prince of Saudi Arabia, it appears as if China and MBS struck an agreement to start settling oil trades between the countries using the Chinese yuan. The significance cannot be understated. The exclusive use of dollars to settle oil trades globally, the “petrodollar” has been the basis of U.S. global economic dominance and the foundation of the dollar as the sole reserve currency since the early 1970s. India has also been buying oil from the UAE and settling the trade-in dirham (the UAE’s currency).

Interestingly, in late March France’s Total Energy sold LNG (liquid national gas) and settled the trade using yuan. As the world shifts away from using the dollar as a reserve currency, I believe a competing reserve currency will be used. A transition of the global monetary system away from the dollar and toward a new reserve currency is extraordinarily bullish for the price of gold and silver, particularly the price of each metal priced in dollars. Another development that is exceptionally bullish for the precious metals sector is the emerging bank crisis in the United States and Europe. Because of the interconnectivity of big banks globally via derivatives, these banking accidents do not occur in isolation. I expect more big bank blow-ups will occur. The Fed printed more money to bail out the uninsured depositors of SVB (Silicon Valley Bank) and Signature banks to prevent a run on the banks in general. While not termed “QE” or “a bailout,” that is exactly what occurred. The Fed’s balance sheet jumped in size by $400 billion over a two-week period. While these official monetary inventions may have temporarily stalled the onset of a bigger crisis, they invariably did not fix the underlying systemic problems.

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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