The Precious Metals Week in Review – June 2nd, 2023

1. The cap on government spending in Washington’s deal to raise the federal debt limit adds a fresh headwind to a U.S. economy already burdened by the highest interest rates in decades and reduced access to credit. The tentative deal crafted by President Joe Biden and House Speaker Kevin McCarthy over the weekend, assuming it’s passed by Congress in the coming days, avoids the worst-case scenario of a payments default triggering a financial collapse. But it also could, even if at the margin, add to the risks of a downturn in the world’s largest economy. Federal spending in recent quarters has helped support U.S. growth in the face of headwinds including a slump in residential construction, and the debt-limit deal is likely to at least damp that impetus. Two weeks before the debt-limit deal, economists had calculated the chance of a recession in the coming year at 65%. “This will make fiscal policy slightly more restrictive at the same time that monetary policy is restrictive and likely to get more so,” said Diane Swonk, chief economist at KPMG LLP. “We have both policies moving in reverse and amplifying each other.” The spending limits are expected to be applied starting with the fiscal year beginning Oct. 1, though it’s possible small effects will emerge before then, such as through clawbacks of Covid assistance or the impact of phasing out forbearance toward student debt. The International Monetary Fund last week said that the U.S. would need to tighten its primary budget — that is, excluding debt-interest payments by some 5 percentage points of GDP “to put public debt on a decisively downward path by the end of this decade.” Keeping spending at 2023 levels would fall well short of such major restraint.

2. President Joe Biden and his European allies have repeatedly stressed their desire to “de-risk,” not “decouple,” from the Chinese economy in recent months as a way to explain a slew of new restrictions on trade with Beijing. The problem is, for China, there’s no difference. Chinese state media, officials and academics have all publicly rejected the distinction in recent weeks, in a seemingly concerted effort to undermine the rhetorical shift. The official Xinhua News Agency said Friday that “de-risking is just decoupling in disguise.” Fu Cong, China’s ambassador to the European Union, pressed leaders to define what de-risking entails. “If de-risking means ridding China of global industrial and supply chains, especially in key areas, and when it involves key technology, we are firmly opposed to that,” he said. Washington’s attempts to deprive China of cutting-edge chips over national security concerns have sparked concerns of a new technology cold war. “Pushing for de-coupling brings the U.S. a lot of international pressure due to its huge economic impact,” said Zhu Feng, a professor of international relations at Nanjing University, adding that the term “de-risking” gives the U.S. more space to maneuver. “There’s no substantial difference between the two terms,” he added. “I don’t see the change in rhetoric bringing any adjustments in policies.” Still, the researchers cautioned that the new language didn’t mean there would be any fundamental change in their strategy, such as the U.S. rolling back trade sanctions on Chinese entities. The U.S. government is spending billions of dollars to build out state-of-the-art domestic semiconductor manufacturing capacity. But spending money is no guarantee of success. In fact, there are already worries that the CHIPS Act passed by the Biden administration isn’t succeeding, due to various roadblocks, speedbumps, and unforced errors. So, what are the odds that it will pay off?

3. A key argument was made for gold as “insurance,” said Dominic Frisby, author of FlyingFrisby.com On May 6, Frisby spoke at Deutsche Goldmesse in Frankfurt, Germany. Frisby gave the rationale for gold. “I’m a big believer in the maximum of putting five or ten percent of your net worth in gold,” said Frisby, noting the metal’s longevity as a store of value. “The instinct for gold is the most deep-rooted commercial instinct in the human race. In a nutshell, that is why you should own gold: because there is a permanence to it that no other substance has.” Frisby said gold does best when trust in the system is low, noting heightened culture wars and other conflicts. “Financial crises seem to get more frequent,” said Frisby. “You can just feel trust in the system generally eroding.”

4. Firms and individuals should familiarize themselves with artificial intelligence or risk losing out, according to Nvidia Corp. co-founder and Chief Executive Officer Jensen Huang. Huang, whose chip design company reached an all-time high last Friday fueled by huge demand from AI service providers. He said innovative technology will transform the corporate landscape and change every single job. “Agile companies will take advantage of AI and boost their position. Companies less so will perish,” the CEO told graduating students at the National Taiwan University in Taipei. “While some worry that AI may take their jobs, someone who’s expert with AI will.” The technology, thrust into the popular consciousness by OpenAI’s ChatGPT late last year, will be used as a copilot to supercharge the performance of workers across a wide range of industries, while also creating new jobs that never existed and making some others obsolete, Huang said. He told the students to create something new in the AI age fast, or risk getting left behind. “In 40 years, we created the PC, Internet, mobile, cloud, and now the AI era. What will you create? Whatever it is, run after it like we did. Run, don’t walk,” he said. “Either you are running for food, or you are running from becoming food.” In other related news a U.S. Air Force official shared a disturbing tale of a military drone powered by artificial intelligence turning on its human operator in simulated war games because that person was keeping it from accomplishing its objective.

5. Stocks and bonds are sending opposite signals about whether U.S. inflation will abate on its own, according to billionaire hedge fund founder Cliff Asness, who called the divergence his “biggest concern.” Unlike stocks, the bond market is telegraphing that the Federal Reserve will make aggressive interest-rate cuts over the next year or two. That would trigger a recession that wouldn’t be mild, he said. “If inflation stays sticky or it comes down because we enter a nontrivial recession, it’s equities that I think are a scary place,” Asness said. “They’re not priced very consistently with bonds.” Still, he said, the U.S. could see “immaculate” disinflation that doesn’t come at the cost of growth. “I don’t think the Fed had much of a choice. I think they were slightly behind the curve. And inflation certainly was sticking around. Whether we have a hard landing or not, the only really good case is inflation just goes away on its own. That’s a pretty good case. The world will do very well. My biggest concern and probably our firm’s biggest concern is stocks and bonds seem to be taking a very, very different view.” Bonds, whether it’s a risk premium or a forecast of future interest rates — if it’s a forecast of future interest rates, what’s priced into the short-term curve is multiple, severe cuts over the next year to two years. That is a recession, and not a mild one, in the forecast. “Equities are, I’m not saying it’s a graveyard, but they’re whistling past that. So that doesn’t mean bonds are right. Equities could be right. You could get what some people have called the immaculate deflation, where inflation comes down and growth doesn’t suffer. But if inflation stays sticky or it comes down because we enter a nontrivial recession, it’s equities that I think are a scary place. They’re not priced very consistently with bonds. And we’re going to find out who’s right next year.”

6. Home prices rose for a second straight month as buyers returning to the market competed over few homes for sale. A measure of prices nationally increased 0.4% in March from a month earlier, according to seasonally adjusted data from S&P CoreLogic Case-Shiller. Demand is picking back up in parts of the U.S. as buyers start to adjust to much higher borrowing costs that shot up starting last year. But transactions remain relatively slow as homeowners are often reluctant to sell and give up lower rates, keeping inventory for previously owned homes tight. Buyers are still confronting high borrowing costs compared to a year ago. Mortgage rates have climbed recently as markets react to deliberations on the U.S. debt ceiling. The average rate on a 30-year loan hit 6.57% last week, up from 3.22% in early January 2022, according to data from Freddie Mac. The challenges posed by current mortgage rates and the continuing possibility of economic weakness are likely to remain a headwind for housing prices for at least the next several months.

7. The U.S. economy defied predictions of a slowdown to add strong 339,000 jobs in May. The figures released by the Bureau of Labor Statistics crushed economists’ expectations of the 190,000 new positions that would be added. In the week ending May 27, the advance figure for seasonally adjusted initial claims was 232,000, an increase of 2,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 229,000 to 230,000. The 4-week moving average was 229,500, a decrease of 2,500 from the previous week’s revised average. The previous week’s average was revised up by 250 from 231,750 to 232,000.

8. Oil prices were up on Friday morning after the U.S. debt ceiling was lifted and the risk of default was removed from markets. The lifting of the U.S. debt ceiling, avoiding a government shutdown, has seen bullish sentiment return to the oil market, lifting Brent back above $75 per barrel and WTI (West Texas Intermediate) above $71 per barrel. While rising U.S. crude inventories and the weak outlook of Chinese manufacturing are adding downward pressure to oil prices, the upcoming OPEC+ meeting this weekend might provide another boost for prices if the group decides to cut production.

9. EUR/USD picks up extra selling pressure after the release of the Nonfarm Payrolls showed the U.S. economy added 339K jobs during May, surpassing initial expectations for a gain of 190K jobs. In addition, the April reading was revised up to 294K (from 253K). EUR/USD attempts to consolidate the recent breakout of the 1.0700 barrier following the resumption of the selling pressure in the greenback.

10. USD/JPY spikes and retreats on mixed U.S. NFP (Non-Farm Payrolls) report, up a little above 139.00 mark. The USD/JYP pair jumps to a fresh high around the 139.45 region during the early North America session, albeit meets with a fresh supply at higher levels. Spot prices quickly retreat to the lower end of the daily range and currently trade just above the 139.00 mark following the release of the mixed U.S. monthly jobs data.

The U.S. Senate prepared Thursday to take up the debt-limit deal forged by President Joe Biden and House Speaker Kevin McCarthy with some senators threatening to delay the measure as a default deadline nears. Lawmakers from both parties in the House joined to approve the bill 314-117 Wednesday evening. The legislation would impose restraints on government spending through the 2024 election and avert a destabilizing U.S. default. Investors have largely judged the risk of a default as resolved and are shifting their attention to other uncertainties, such as another possible Federal Reserve interest-rate increase and signs of a weakening Chinese economy. The debt-limit agreement won the backing of two-thirds of House Republicans in a rare moment of bipartisan accord in a bitterly divided Washington. The Senate passed the debt-limit deal with a 63-36 majority, ending the threat of a default.

China declined a U.S. request for the countries’ defense chiefs to meet this week, Beijing’s latest rebuff of the Biden administration’s efforts to restore ties with key officials amid heightened tensions. The U.S. had proposed in May that Secretary of Defense Lloyd Austin meet his counterpart Li Shangfu in Singapore during the Shangri-La Dialogue, a marquee Asia-Pacific security gathering. Beijing has now formally closed the door on that offer. China previously demanded that the U.S. lift sanctions imposed on its top general in 2018 for overseeing an arms purchase from Russia before such a meeting could take place. In a sign of the tense relationship between the top economies and global powers, the U.S. Defense Department called the decision a “concerning unwillingness” to engage in military discussions. Liu Pengyu, spokesperson at the Chinese Embassy in Washington called on the U.S. to create “favorable” conditions for talks, questioning the “sincerity” of seeking meetings while imposing sanctions. President Joe Biden now faces an unappetizing choice, keep sanctions on Li and sacrifice military talks with Beijing or lift them and risk being seen as soft on China heading into election season. Relations have been rocky since the U.S. slapped sweeping export bans on semiconductor technology, a top politician that visited Taiwan angering Beijing, and an alleged Chinese spy balloon that crossed U.S. territory, all obscuring any goodwill gained from a meeting late last year between President Biden and President Xi Jinping.

In an update to previous reports, American credit card debt has passed $1 trillion for the first time, with the average household now owing $10,000. Some $1.2 trillion was owed in credit card debt by Americans at the end of 2022, a report shows. The Federal reserve estimates a slightly more conservative figure, putting the nation’s credit card debt at $986 billion, a steep incline of $250 billion in two years. With interest rates rising a new credit card now has an average rate of 24 percent, in contrast to 16.65 percent last spring, making repayments a more painful affair. Experts explain the trend as a result of households spending less during lockdowns and receiving stimulus checks that went towards paying down debt. “In 2021, we saw people paying off a record amount of debt,” Jill Gonzalez, a senior analyst at WalletHub told The Hill. “People had been saving through 2020, without much to do” Debt has since increased as the economy re-opened, and inflation has led to the Federal Reserve launching a campaign of sharp interest rate hikes. Credit card debt then rose by $86 billion in the fourth quarter of 2022, the largest increase on record. “The spending is really nonstop now,” Gonzalez explained. “We once thought of putting things on our credit card as frivolous spending, or a big purchase, a TV. Now, because of inflation, people are putting actual necessities, food, housing, on their credit card.” The number of people carrying forward a balance from month to month has also increased from 39 percent this time last year, to 46 percent. With such high interest rates some borrowers will fall into a compound interest cycle that may be difficult to extricate themselves from.

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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