The Precious Metals Week in Review – May 19th, 2023

1. Two Federal Reserve officials signaled they favored pausing interest-rate increases, while a third policymaker said the central bank’s task in subduing inflation was not complete. “We at the Federal Reserve probably have more work to do on our end to try to bring inflation back down,” Minneapolis Fed President Neel Kashkari said Monday. “The labor market is still hot, and we have not seen much softening in the labor market. So, that tells me that we have a long way to go before we get inflation back down,” he said. The Federal Open Market Committee raised rates by a quarter percentage point at a meeting earlier this month, bringing its benchmark to a target range of 5% to 5.25% and signaling it may be ready to pause its tightening cycle at the next meeting in June. “There is still a lot of the impact of the 500 basis points we did in the last year that’s still to come. And you add on that there are tight credit conditions. And I think that we should be extra mindful,” he said. Investors bet that the central bank will hold rates next month but begin cutting later in the year. “My baseline case is we won’t really be thinking about cutting until well into 2024,” were remarks from his Atlanta Fed counterpart Raphael Bostic. “If you look at most measures of inflation, they’re still two times where our target is. And so that’s a long distance still to go.”

2. There was significant news out of China Monday, as they effectively made gold money again. Not just as an SOV (store of value), but as a Medium of Exchange linking state-run savings accounts with gold bullion accounts. The commercial banks in China created the ability for Renminbi savings accounts to be connected to gold accounts so that Chinese citizens can now buy gold directly out of those savings accounts. All of this is similar to linking savings to checking at a bank. By China enabling its citizens to buy Gold with a click using their already connected savings accounts, you are going to see an even faster drawdown of Western gold as it gets bought in the East. China is effectively setting up a one-way straw to drink the West’s Bullion wealth. Because as we know that gold will not be allowed to check out of China once it checks into it. The question is, does JPMorgan help them insert the straw to get access to China accounts or not? China has long been encouraging its population to purchase gold, and the new policy has just made it even easier to do so. This is also happening while JP Morgan’s Jamie Dimon is on his way to China for the first time in 4 years, while not a gold-trip perse, is hardly a coincidence. What are the potential reasons Jamie is visiting China, and the potential links they might be aiming to develop regarding business in the gold and other markets. There have also been talks about the declining silver inventories on the COMEX, and whether there really is a significant amount of silver available to be delivered.

3. Up and down Wall Street, teams are huddling inside banks and gauging the risks to themselves, their clients, and markets if U.S. lawmakers fail to raise the debt ceiling. Their message to the Biden administration and Congress: Get it done… now. Executives from banks including the nation’s three biggest, JPMorgan Chase, Bank of America, and Citigroup, are spreading the word inside Washington’s corridors of power, and sometimes even publicly, that the damage to U.S. businesses and the economy will start well before a technical default. Financial firms are already racking up expenses as they rush to prepare, assigning workers and executives, including heads of trading, corporate banking, and consumer banking, to study how the government’s failure to pay bills would cascade through markets, according to people with knowledge of the situation. Efforts to brace balance sheets and advise clients on contingency planning are prompting a surge of costly hedges. “We want to make sure market participants have a collective sense of how the system, the pipes that make things function, will work in the event of a breaching of the debt ceiling,” said Rob Toomey, the head of capital markets at the Securities Industry & Financial Markets Association. “It’s never happened, so we don’t know to what degree the markets will be impacted.” Bank executives’ advice to Washington to reach a deal quickly contrasts with the pace of talks there, where the deadline cited most often is the so-called X-day, when the government is expected to exhaust options for funding itself. That is projected to happen in just a few weeks. Yet on Monday, Republican House Speaker Kevin McCarthy said negotiations are “nowhere near reaching a conclusion.” He and other congressional leaders are set to join President Joe Biden at the White House again Tuesday. “The last thing that the world and America needs is to have a debt ceiling crisis,” Citigroup CEO Jane Fraser said earlier this month, calling the consequences “quite dire” for consumers, corporates, and investors.

4. The fight over who bears the blame for the recent U.S. bank failures will turn ever more political on Tuesday when lawmakers grill the lenders’ former senior managers and top regulators. Greg Becker, ex-chief executive officer of Silicon Valley Bank, and Scott Shay, who served as chairman of Signature Bank, are among those set to testify in the Senate Banking Committee. U.S. lawmakers and regulators have accused leadership at both banks of mismanagement. Tuesday’s hearings in Washington, which also feature top banking regulators testifying before the House Financial Services Committee, are the latest twist in a months-long saga that has taken down four midsized lenders and has put Americans on edge over the banking system. In addition to the leadership at the firms, some have blamed U.S. watchdogs for not doing more to prevent the turmoil. Arthur Wilmarth, professor emeritus at George Washington University Law School, said GOP lawmakers will likely go hard on the banking agencies during the hearings, arguing they didn’t do enough to enforce existing rules. However, there are signs that SVB managers were aware of risks long before the Fed started raising rates and the lender became the biggest U.S. bank failure in more than a decade on March 10. In late 2020, the firm’s asset-liability committee received an internal recommendation to buy shorter-term bonds as more deposits flowed in. That shift would reduce the risk of sizable losses if interest rates rose quickly. But it would have a cost: an estimated $18 million reduction in earnings, with a $36 million hit going forward from there. Executives balked, and, instead, the company continued to plow cash into higher-yielding assets. One area where lawmakers may find common ground is executive pay and compensation. Becker, the ex-SVB CEO, for example, has drawn criticism for selling $3.6 million of company stock under a trading plan less than two weeks before the firm disclosed extensive losses ahead of its failure. Meanwhile, the Fed’s vice chair for supervision said he wants more oversight of executive compensation in the wake of the bank failures. Silicon Valley Bank’s managers responded to “poor incentives” approved by its board of directors and were not paid to keep risks in check. “They were not compensated to manage the bank’s risk, and they did not do so effectively.”

5. U.S. retail sales increased in April, suggesting consumer spending is holding up in the face of economic headwinds including inflation and high borrowing costs. The value of retail purchases rose 0.4% after an upwardly revised 0.7% decrease in March, Commerce Department data showed Tuesday. Excluding autos and gasoline, sales increased 0.6%. The figures aren’t adjusted for inflation. While the overall figure came in below the median estimate in a survey of economists, the gain in sales excluding autos and gasoline topped expectations. Seven out of 13 retail categories rose last month, including advances at auto dealers, general merchandise outlets, and online merchants. The advance in April sales suggests low unemployment and steady wage growth are supporting demand for merchandise. “The bottom line is that consumers still have the means to spend,” Tim Quinlan and Shannon Seery, economists at Wells Fargo said in a note. “Whereas in the early days of the pandemic excess savings afforded households the ability to splurge on goods, today a sturdy jobs market and steady real income gains are supporting consumption.” The S&P 500 opened lower, 10-year Treasury yields rose, and the dollar was little changed. Still, Americans continue to shift more of their discretionary purchases to services and there are some signs consumers are overextending themselves. Sales fell at furniture retailers, sporting goods, and other hobby stores, and at appliances and electronics outlets. Receipts at restaurants and bars, the only service-sector category in the report, climbed 0.6%.

6. Sales of previously owned U.S. homes fell to a three-month low in April, restrained by limited inventory and ongoing affordability concerns. Contract closings decreased 3.4% last month to an annualized pace of 4.28 million, according to data released Thursday by the National Association of Realtors. The figure was in line with the median estimate in a survey of economists. “Home sales are bouncing back and forth but remain above recent cyclical lows,” Lawrence Yun, NAR’s chief economist, said in a statement. “The combination of job gains, limited inventory, and fluctuating mortgage rates over the last several months have created an environment of push-pull housing demand.” With mortgage rates about twice as high as they were at the end of 2021, many sellers are still reluctant to list their houses, and some buyers are sidelined.

7. Applications for U.S. unemployment benefits fell by the most since 2021 after fraudulent claims in at least one state boosted the numbers in previous weeks. Initial unemployment claims fell by 22,000 to 242,000 in the week ended May 13, Labor Department data showed Thursday. On an unadjusted basis, claims decreased by the most in two months, to 215,810, largely due to a drop in Massachusetts. Some economists have been wary about drawing strong conclusions from the data amid reports that fraudulent claims have been behind the recent upward trend in filings. Massachusetts accounted for nearly half of the nationwide increase in unadjusted claims in the week through May 6, and state officials said it was mainly due to fraud. Kentucky has also found an increase in the number of “imposter” claims.

8. After a month of downside pressures and increasingly bearish sentiment, oil prices have finally broken the vicious circle and are set for their first weekly gain in a month. West Texas Intermediate futures climbed above $72 a barrel, bringing this week’s gain to about 3%. House Speaker Kevin McCarthy said negotiators may reach an agreement in principle as soon as this weekend. Crude is still down 10% this year as China’s lackluster economic recovery and monetary tightening by the Federal Reserve weighed on the outlook. Brent for July settlement gained 0.5% to $76.24 a barrel.

9. EUR/USD is trading around 1.0800 as investors await Chairman Powell’s speech. The U.S. Dollar is correcting across the board amid a better market mood. ECB President Lagarde’s remarks aid the EUR/USD recovery. Economists at UBS expect EUR/USD to advance nicely throughout the rest of the year and reach 1.16 by end-2023.

10. USD/JPY punches to its highest level since November 2022. Japan eyes Core CPI. The Japanese yen’s woes continue, as the currency has plunged a massive 400 points over the past week. In Thursday’s North American session, the yen is trading at 138.52, up 0.60% on the day. USD/JPY hasn’t been at such high levels since November 2022.

President Joe Biden expressed confidence that negotiators would reach an agreement to avoid a catastrophic default, even as House Speaker Kevin McCarthy criticized his decision to travel to Japan for an international summit. “I’m confident that we’ll get the agreement on the budget and that America will not default,” Biden said on Wednesday. On Capitol Hill, McCarthy and other Republican lawmakers criticized Biden for his decision to travel, with the House speaker labeling the president “a big obstacle” to an agreement. “Mr. President, stop hiding, stop traveling,” McCarthy said. McCarthy also said he remained hopeful a deal could be reached, and he planned to stay engaged in negotiations. Biden, for his part, said he planned to remain in close contact with the speaker and negotiators as he traveled overseas. Both lawmakers and White House officials have expressed cautious optimism in recent days, stocks rose, and Treasuries fell Wednesday on hopes of a breakthrough. Still, the Treasury Department has warned the US could breach the debt ceiling as soon as June 1. Economists have warned that a default would spike borrowing costs, rattle markets, and prompt widespread job losses.

JPMorgan Chase Chief Executive Officer Jamie Dimon said Wednesday the U.S. government “probably” will not default on its debts. Dimon, Citigroup CEO Jane Fraser, and other top executives of major banks met with Senate Majority Leader Chuck Schumer and discussed the debt limit, with the government potentially just two weeks away from a catastrophic payments default. “The U.S. should not and probably will not default,” he told reporters after the meeting. Dimon has said his bank has a war room set up for the possibility of default. “Whatever it is, we will be prepared,” he told reporters.

More U.S. households continue to struggle to meet expenses now than in the immediate aftermath of the Covid-19 pandemic when millions lost their means of employment, a Census Bureau survey showed. Almost 38.5% of American homes, the equivalent of about 89.1 million, faced difficulty in paying for usual home expenses between April 26 and May 8, according to the latest Household Pulse Survey. That’s up from 34.4% a year ago and 26.7% during the same period in 2021. The share of struggling households varies widely by geography. Residents in states with lower median incomes such as Louisiana and Mississippi are facing the largest budget problems. In 15 states, more than 4 in 10 adults live in households where it has been somewhat or very difficult to pay for usual household expenses in the last seven days. And in some metro areas, such as Los Angeles and Riverside, California, almost half of households are struggling. To combat these budget problems, many households are turning to credit cards for help. More than 25 million households say that they used credit cards or obtained a loan to meet spending needs. That’s up from 22.4 million a year earlier. The use of credit cards will likely bring additional budget worries in the near term as the average interest rate on this type of debt now exceeds 20%.

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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