The Precious Metals Week in Review – May 12th, 2023

1. Investors should be prepared to see higher volatility in the gold market as market expectations contrast sharply with what the Federal Reserve has signaled regarding the future path of interest rates. However, several market analysts are recommending investors ignore the noise and focus on the broader bullish trend in the marketplace. If you are a long-term investor and looking to own gold for the next five years, then this price is right. Looking past the noise, gold prices are most probably going to be a lot higher five years from now.

2. In Washington debt-ceiling brinkmanship is threatening to push the U.S. into default. And on Wall Street, traders are gaming out what could be a rare Black Swan event. In the options market, hedges against a volatility breakout are seeing the most demand in five years. The cost to protect against a market selloff of around 10%, or one standard deviation, is the highest in a year. Demand for tail-risk hedges that pay out in a fall as precipitous as 30%, or three deviations, a Black Swan event, has risen to levels last seen at the peak of March’s banking turmoil. The doomsday hedging is taking place on the market fringes, against a pervasive calm that’s pushed the widely used CBOE Volatility Index, or VIX, below its one-year average. But veterans warn it may be the calm before the storm, just like in 2011 when few took notice of a funding impasse until it pushed the U.S. to the brink of default.

3. U.S. equities slumped as a debt-ceiling impasse dragged on sentiment. The dollar edged higher. The S&P 500 traded down 0.5% on Tuesday while the tech-heavy Nasdaq 100 slid 0.5%. The gauges have been stuck in narrow trading ranges for over a month as traders weigh the end of the Federal Reserve’s interest rate hiking cycle against the possibility of an economic slowdown. The sentiment was also hurt by a report showing a steep drop in Chinese imports last month, a sign that the economy’s recovery from Covid lockdown isn’t as strong as many had hoped. Oil fell to $72.32 a barrel.

4. On May 2, a Texas House committee passed a bill to create 100% reserve gold and silver-backed transactional currencies. Enactment of this legislation would create an option for people to conduct business in sound money, set the stage to undermine the Federal Reserve’s monopoly on money, and possibly create a viable alternative to a central bank digital currency (CBDC). Rep. Mark Dorazio (R) introduced HB4903 on March 10 and it has since garnered a bipartisan coalition of 42 cosponsors. The legislation would require the state comptroller to establish and provide for the issuance of gold and silver species and establish digital currencies that are 100% backed by gold and silver, and 100% redeemable in cash, gold, or silver. Specie is defined as “a precious metal stamped into coins of uniform shape, size, design, content, and purity, suitable for or customarily used as currency, as a medium of exchange, or as the medium for purchase, sale, storage, transfer, or delivery of precious metals in retail or wholesale transactions.”

In establishing gold and silver specie, the comptroller would be required to authorize the Texas Bullion Depository as issuer and ensure that the holder of the specie may use the specie as legal tender in payment of debt and readily transfer the specie to another person. The comptroller would also be required to create a mechanism to use 100% backed gold and silver digital currencies in everyday transactions. Physical gold and silver backing the digital currency would be stored in a pooled account at the Texas State Bullion Depository. This is one of several bills introduced in the Texas legislature this year to promote sound money, including legislation to establish state gold and silver reserves, and a bill to make gold and silver legal tender in the Lone Star State. Creating gold and silver-backed digital currencies would take another step in the process of abolishing the Federal Reserve system by attacking it from the bottom up – pulling the rug out from under it by working to make its functions irrelevant at the state and local levels and setting the stage to undermine the Federal Reserve monopoly by introducing competition into the monetary system.

5. The Biden administration is proposing new limits on greenhouse gas emissions from coal and gas-fired power plants, its most ambitious effort yet to roll back planet-warming pollution from the nation’s second-largest contributor to climate change. If finalized, the proposed regulation would mark the first time the federal government has restricted carbon dioxide emissions from existing power plants, which generate about 25% of U.S. greenhouse gas pollution, second only to the transportation sector. The rule also would apply to future electric plants. Plants that cannot meet the new standards would be forced to retire. Coal provides about 20% of U.S. electricity, down from about 45% in 2010. Natural gas provides about 40% of U.S. electricity. The remainder comes from nuclear energy and renewables such as wind, solar, and hydropower. Carbon emissions from the U.S. power sector are at the same level as in 1984, while electricity use has climbed 73% since then. About 60% of the electricity generated in the U.S. last year came from burning fossil fuels at the nation’s 3,400 coal and gas-fired plants, according to the U.S. Energy Information Administration. For balance and as mentioned in a previous report, there has been less than a 1°C rise in global temperatures in the past 100 years. 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. Public confidence in Jerome Powell’s leadership of the Federal Reserve has dropped precipitously, according to a new survey, and is now at or below his predecessors as the central bank wages its war against inflation. A Gallup poll released Tuesday shows 36% of U.S. adults say they have a “great deal” or a “fair amount” of confidence that the Federal Reserve chairman would do or recommend the right thing for the economy. That’s lower than Janet Yellen’s 37% during her first year leading the Fed in 2014 and is the lowest level recorded since Gallup began tracking public confidence in the central banking chief in 2001. Former Chairman Ben Bernanke’s lowest point came in 2012, at 39%. Confidence in the Fed generally follows the health of the economy. But as inflation mounted and the Fed began to raise interest rates as a result, Powell’s approval dropped sharply. President Joe Biden has the confidence of 35% of Americans in the economy, the lowest of any president since George W. Bush received 34% during the 2008 financial crisis. Yellen, now Biden’s Treasury secretary, is at 37%, the lowest in that job since Jacob Lew’s 20% in 2014.

7. China added to its gold reserves for a sixth straight month, extending a flurry of purchases as central banks around the world expand their holdings of bullion amid escalating geopolitical and economic risks. China raised its gold holdings by about 8.09 tons in April, according to data from the State Administration of Foreign Exchange on Sunday. Total stockpiles now sit at about 2,076 tons, after the nation increased reserves by about 120 tons in the five months through March. Central banks have purchased large amounts of gold in the past year to diversify assets, as well as to protect reserves from the impact of a weakening dollar and rampant inflation. While inflows moderated in the first quarter of 2023, volumes were still at historically elevated levels, according to the World Gold Council. Singapore, China, and Turkey were among the biggest buyers. The voracious appetite for gold has helped prices scale near-record highs as markets fret over a slowing US economy and signs of persistent credit stress. Geopolitical risks stemming from increasingly fragile Sino-American relations are also boosting the safe-haven appeal of bullion.

8. Applications for unemployment benefits climbed to a more than one-year high and wholesale inflation continued to moderate, adding to signs of softening in the economy. In the week ending May 6, the advance figure for seasonally adjusted initial claims was 264,000, an increase of 22,000 from the previous week’s unrevised level of 242,000. This is the highest level for initial claims since October 30, 2021, when it was 264,000. The 4-week moving average was 245,250, an increase of 6,000 from the previous week’s unrevised average of 239,250. This is the highest level for this average since November 20, 2021, when it was 249,250.

9. Oil futures traded higher Friday, looking to shake off a loss for the week after worries over the economic outlook pulled prices down for three weeks in a row. West Texas Intermediate crude for June delivery rose 75 cents, or 1.1%, to $71.62 a barrel on the New York Mercantile Exchange, prompting the U.S. benchmark to turn up by 0.3% for the week. July Brent crude, the global benchmark, gained 75 cents, or 1%, to trade at $75.73 a barrel, moving up by 0.6% for the week.

10. EUR/USD stays on the back foot and trades in negative territory slightly below 1.0900 on Friday. The data from the US showed that the UoM Consumer Confidence Index dropped to 57.7 in May from 63.5 in April. The risk-averse market environment helps the US Dollar hold its ground.

11. USD/JPY sticks to modest gains, remains below 135.00 amid subdued USD price action. The USD/JPY pair builds on the overnight goodish rebound from the 133.75 region, or a one-week low, and gains some follow-through traction for the second successive day on Friday.

Treasury Secretary Janet Yellen said that the federal government will have to renege on some payments if Congress doesn’t raise the debt limit, though no plan on how the department would proceed has yet been presented to President Joe Biden. “If Congress fails to do that, it really impairs our credit rating. We have to default on some obligation, whether it’s Treasuries or payments to Social Security recipients,” Yellen said Friday in an interview. “That’s something America hasn’t done since 1789. And we shouldn’t start now. So, we’ve not discussed what to do.” Joe Biden and Kevin McCarthy have arrived at a crucial moment in their debt ceiling fight, a meeting that risks cementing their standoff rather than yielding a breakthrough in a crisis already unnerving market. The president will host the House Speaker and other congressional leaders at the White House on Tuesday, with McCarthy seeking spending cuts as a condition of suspending or raising the debt limit and Biden pushing to separate the issues and calling for a debt limit increase. The stakes are higher than just politics, a default would surely trigger a market selloff and the White House has said it could cost millions of jobs. Treasury bill markets last week revealed fresh apprehension about the potential for non-payment of U.S. debts in early June. Yet expectations for the meeting are low. Biden has said he plans to hold to his vow not to negotiate over the debt ceiling, arguing that doing so would set a dangerous precedent allowing Republicans to hold the nation’s economy hostage over their preferred policy outcomes. The dramatic and unblinking game of political chicken playing out across Pennsylvania Avenue has also prompted a renewed examination of novel executive action, such as Biden invoking the 14th Amendment that says the validity of the nation’s public debt shall not be questioned.

Federal Reserve Chair Jerome Powell reckons the U.S. economy can skirt recession. But the odds are stacked against him, thanks to banking, politics, and even the weather. In Powell’s view, the gravity-defying strength of American labor markets was on display again in jobs data published Friday, which showed a bumper increase last month. “It’s possible that this time is really different,” the Fed chief told reporters last week after raising rates for a tenth straight time. Still, a labor market that remains too-hot-to-handle means the Fed will have to hold rates higher for longer to quell inflation, the very reason recession risks are so high. And for Powell’s forecast to come true, the U.S. economy will have to overcome three major obstacles, all pointing to a downturn in the second half of this year.

1. A looming credit crunches. Driven by the combined impact of Fed tightening and bank failures, it will likely hit small businesses and commercial real estate especially hard.
2. A debt-ceiling deadlock in Washington. Coming to a head right now, the partisan standoff threatens a period of intense financial stress. If the U.S. government does default, the blow to the economy and markets could rival the 2008 crash.
3. A climate wildcard from El Niño. The weather system is gathering force, threatening extreme conditions around the world that would disrupt commodity supplies, push prices higher, and keep the Fed focused on inflation.

And if this trifecta does tip the economy into a slump, there may not be much that Powell and his colleagues can do about it. Rate cuts are the main recession-fighting tool, but it’s tricky for the Fed to deploy them when it’s still struggling to bring inflation back to target.

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)

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.