The Precious Metals Week in Review – June 9th, 2023

1. As they stepped hand in hand from OPEC’s headquarters into the Vienna sun on Saturday, the group’s two Gulf heavyweights signaled that a long rift was over. The weekend’s OPEC+ meeting ended with a pledge from Saudi Arabia to cut its oil production by an extra 1 million barrels a day in July, while other members merely extended their existing curbs by 12 months. Saudi Arabia’s bold move means ceding market share to other oil producers including Russia, which has been aggressively targeting buyers in Asia since Europe banned most imports of its oil following Moscow’s invasion of Ukraine. This is important as the impact of OPEC-wide cuts is often blunted by the inability of some members to produce as much as their quotas. Angola and Nigeria agreed to lower their output quotas subject to an independent review, after struggling to meet their targets. This paved the way for the United Arab Emirates to achieve its long-held desire for a higher production quota. It previously threatened to leave the cartel if its output limit wasn’t raised. After securing a higher ceiling from 2024, the country’s energy minister pledged the UAE’s unwavering support for OPEC+. Still, crude prices only moved up slightly on Monday, by around 2%.

2. The Federal Reserve’s June meeting is shaping up to be one of the trickiest in its 15-month campaign to tame inflation: Chair Jerome Powell seems intent on skipping an interest-rate increase while explaining to the public that officials aren’t done yet. The strategy is sensible, confusing, and risky all at once, Fed watchers say. Since March 2022, the U.S. central bank has raised its policy rate at 10 consecutive meetings, to a range of 5% to 5.25%, with the last two increases following bank runs that led to the collapse of four lenders. Now, Powell and several of his colleagues want to take a break at their June 13-14 meeting to assess the outlook, even though their quarterly economic forecasts may show interest rates and inflation moving higher this year than they expected three months ago. One answer is that the Federal Open Market Committee is trying to fight on two fronts. Policymakers want to bring inflation back down to their 2% goal, after more than two years above target. But they also don’t want to push rates so high that they overshoot and crush the economy. “Skipping a rate hike at a coming meeting would allow the committee to see more data before making decisions about the extent of additional policy firming,” Fed Governor Philip Jefferson said on May 31. Skipping a rate hike in June could make it more difficult for officials to restart if needed. To avoid that outcome, Powell will need to make clear at his post-meeting press conference that it may take more work to lower inflation. “The messaging is going to be tough,” said Diane Swonk, chief economist at KPMG LLP in Chicago. “The biggest risk is that markets start front-running them on cuts” later this year.

3. In crypto news blockchain analytics platform Nansen said it is laying off 30% of its workforce, citing broader difficulties in the crypto market. The firm had tried to expand into business areas that were not core to the company’s strategy, Nansen CEO Alex Svanevik said in a statement posted on Twitter. Founded in 2019, the startup’s expansion coincided with a boom in demand for crypto asset services and investment. Nansen’s “cost base is too high relative to where the company is today,” Svanevik said in the statement, adding that the business has “several years of runway” left. Headquartered in Singapore, the firm had around 120 employees last year, according to data. Over the past year, the cryptocurrency sector has been dealing with an ongoing rout in prices which has triggered a wave of bankruptcies, layoffs, and company failures across the globe.

4. Binance, the world’s largest cryptocurrency exchange, has been sued by the Securities and Exchange Commission for allegedly running an illegal exchange in the U.S. The lawsuit, which is the latest action taken by regulators to get crypto firms to comply with U.S. law was filed in federal court in the District of Columbia on Monday. Changpeng Zhao is the founder and controlling shareholder of the cryptocurrency – and Wall Street regulator SEC filed 13 charges against the company for allegedly mishandling billions in customer funds, as well as lying to regulators and investors about its operations. The complaint also claims the defendants secretly commingled billions of dollars of investor assets and sent them to a third party, Merit Peak Limited, which is also owned by Zhao. Gurbir S. Grewal, director of the SEC’s enforcement division, said: “We allege that Zhao and the Binance entities not only knew the rules of the road, but they also consciously chose to evade them and put their customers and investors at risk.” The price of Binance plummeted dramatically to 1 BNB = $284.79 just 30 minutes after the news that the exchange was under investigation. The Securities and Exchange Commission also sued Coinbase Global in federal court in New York on Tuesday, alleging the crypto firm broke its rules for years. The regulator said that Coinbase, the largest U.S. crypto platform, evaded regulations by letting users trade numerous crypto tokens that were unregistered securities. Coinbase fell 15% to $50 at 8:52 a.m. in New York.

5. Business chiefs have warned that Germany faces electricity shortages that will see critical industries ditch the country after the government decided to shut down the last remaining nuclear power plants in favor of renewable energy sources. The head of energy firm RWE said he fears that Germany will face a shortage of electricity that will see prices in the already struggling country soar. Markus Krebber, 50, warned that this will endanger Germany’s ‘competitiveness’ as an industrial hub, meaning companies will be driven out of the country, taking much-needed jobs with them. “Germany’s prosperity is based on strong industry,” Krebber said. “A scarce energy supply leads to high prices – this endangers the competitiveness of Germany as an industrial location. We are seeing the first signs of de-industrialization.” German energy chiefs have blamed the country’s poor outlook on the government’s green energy ‘disaster’ that has seen the last remaining nuclear power plants shut down. Instead, the focus is now on renewable energy supplies from solar and wind sites. But the intermittent nature of these green energy sources, which leaves them susceptible to sudden drops during cloudy or windless periods, means Germany’s electricity system remains vulnerable to electricity shortages and price volatility. Krebber warned that this could have a devastating impact on Germany’s industries that are trying in vain to prop up the country’s flailing economy. “As an industrial location, Germany has a serious problem: We don’t have as much energy available as we need,” Krebber told Focus. “This gap leads to high prices and thus to justified concerns about competitiveness.” This is all playing into the hands of Germany’s far-right parties, with the Alternative for Germany (AfD)’s popularity surging in the polls over its criticism of what it calls a costly green agenda. The AfD, which disputes that human activity is a cause of climate change, has tapped into concerns among some voters about the cost of the transition away from fossil fuels. Christian Kullmann, CEO of the chemical group Evonik, joined Krebber in criticizing what he called the government’s “energy policy disaster” and warned of its impact on Germany’s industries. “In Germany, we pay the world’s highest prices for electricity and energy, and every industry, every economy lives and depends on a reasonable, inexpensive, available energy supply,” Kullmann, said. He further warned that Germany, which has historically been a hub for engineering, will see bulk goods no longer being manufactured in the country.

6. JPMorgan Chase & Co. has tied up with six Indian banks to introduce a blockchain-based platform to settle interbank dollar transactions in the nation’s newest international financial hub. “We will be running a pilot project for the next few months as we need to analyze banks’ experience,” Kaustubh Kulkarni, senior country officer, in India and vice chairman, Asia Pacific at JPMorgan, said in an interview. The move will provide a further fillip to New Delhi’s attempt to position the Gujarat International Finance Tec-City as an alternative trading center to Singapore and Dubai. The Reserve Bank of India has started a domestic non-deliverable forward market settled in dollars at GIFT City. Under the existing settlement system, it could take a few hours for the settlement to complete. Moreover, transactions are not settled on Saturdays and Sundays, or public holidays. The real-time blockchain-backed system will remove this hindrance to make it available round-the-clock. “By leveraging blockchain technology to facilitate transactions on a 24×7 basis, the processing is instantaneous and enables GIFT City banks to support their own time zone and operating hours,” said Kulkarni.

7. In the week ending June 3, the advance figure for seasonally adjusted initial claims was 261,000, an increase of 28,000 from the previous week’s revised level. This is the highest level for initial claims since October 30, 2021, when it was 264,000. The previous week’s level was revised up by 1,000 from 232,000 to 233,000. The 4-week moving average was 237,250, an increase of 7,500 from the previous week’s revised average. The previous week’s average was revised up by 250 from 229,500 to 229,750.

8. Crude oil was heading for the second week of losses in a row despite the additional production cut Saudi Arabia announced at last Sunday’s OPEC+ meeting. In morning trade in Asia today, Brent crude was changing hands for less than $76 per barrel and West Texas Intermediate was trading at below $71. Both were down from close on Thursday. It appears that traders are still more concerned about oil demand than they are about the adequacy of supply.

9. The EUR/USD faces some renewed downside pressure and gives away part of Thursday’s strong move to the vicinity of 1.0800 the figure. A more serious bullish attempt is expected to quickly surpass the so-far monthly high at 1.0787 (June 8) closely followed by the round level at 1.0800, which appears propped up by the transitory 100-day SMA (Simple Moving Average), today at 1.0807. Looking at the longer run, the constructive view remains unchanged while above the 200-day SMA, today at 1.0518.

10. The USD/JPY pair stages a goodish intraday recovery from a fresh weekly low, around the 138.75 regions touched this Friday, and builds on its steady intraday ascent through the early part of the European session. Spot prices climb further beyond the mid-139.00s in the last hour, reversing a major part of the overnight losses.

Coming into the second quarter, the investment landscape was littered with perceived risks to the economy. But little by little, the Wall of Worry is crumbling.

• Regional banking crisis (contained for now)
• Debt ceiling (ultimately, just political theater)
• Upside risks to oil prices after the OPEC+ supply cuts (still hasn’t caused more than a hiccup)
• US-China tension
• War in Ukraine
• The threat of commercial real estate losses
• Plunge in residential real estate affordability

The upshot is that investors (and some economists, too) are finding fewer excuses for pessimism about the economy’s near-term prospects. In the grand scheme, this may be overdoing it a bit on the optimistic side, but the retreat of extreme pessimism has been palpable. A May survey of economists stated the median probability of a recession within 12 months was around 65% The consensus odds may decline a bit, with the resolution of the debt ceiling and the easing of bank jitters, but probably won’t fall below 55%. In the US, there are plenty of pockets of observable vulnerability: The Federal Reserve has just raised interest rates by 500 basis points, hitting consumer sentiment, making credit more expensive, and, ultimately, making banks less willing to lend. But it’s much more difficult to try to divine the shock that will tip the economy into a downturn, let alone put a time frame on it. At some point, the Fed’s monetary-policy medicine should kick in with even greater force and affect consumption and the labor market in earnest. If it doesn’t, policymakers may just administer some more of it. It’s no surprise, then, that even the most optimistic economists think the risks of a recession are elevated.

The U.S. housing story of 2023 is one of two markets moving in different directions. For buyers, dwindling supply and a modest uptick in demand have meant home prices are on the rise again, even with 30-year mortgage rates hovering around 7%. The rental market is trending in the opposite direction, with rising vacancy rates as new apartment buildings hit the market and put downward pressure on rents – at least in metros where there’s been a lot of construction in recent years. This is creating a short-term opportunity for frustrated would-be homebuyers, especially in metro areas that have seen the most construction. In places such as Nashville, Charlotte, and Austin, where rent growth is sluggish and lots more supply will be coming online, these folks can get a great deal on a new apartment now and hope the market for homebuyers is better next year. The latest trends suggest the divergence between the two markets will continue for several months, peaking in the third quarter. So, for people deciding whether they should buy or continue renting for another year, the good news is that the apartment market is generally becoming more favorable and should continue that way for at least a few quarters. The bad news is that while the math on buying is bad now, it’s not clear when or even if it will improve. We could easily be in the same situation a year from now as we are now, still not very much inventory, mortgage rates still around 7%, and home prices up another 5%. If forced to make a decision, renting for another year is probably the best financial decision in most cases. I just wouldn’t expect buying to be any easier next year. The average long-term US mortgage has finally fallen after increasing for three straight weeks, offering some respite for homebuyers. The average rate for the US benchmark 30-year fixed loan – the most common lending package in the country – fell to 6.71 percent from last week’s 6.79 percent.

Senior U.S. and Chinese officials held “candid” talks in Beijing, days after the two countries defense chiefs squared off at a fraught security forum exposing limits in mending the bilateral relationship. Daniel Kritenbrink, the top U.S. State Department official for Asia, met with Vice Foreign Minister Ma Zhaoxu on Monday, becoming the most senior official publicly traveling to Beijing since an alleged Chinese spy balloon derailed ties in February. Both sides described the talks as “candid” and “productive” in their readouts, with the US State Department saying in a Monday release that the exchange was part of ongoing efforts to restore “high-level diplomacy.” The Chinese side called the exchange “constructive” in a statement on Tuesday. The meeting was the latest exchange in a flurry of high-level diplomacy as the world’s two largest economies try to find common ground for dialog, potentially laying the groundwork for a call between President Joe Biden and his Chinese counterpart Xi Jinping. Despite those efforts, the relationship remains strained over a series of ongoing flashpoints, such as Beijing’s territorial claims over the self-ruled island of Taiwan and Washington’s campaign to isolate China from high-tech chips with potential military applications. China’s Defense Minister Li Shangfu refused to meet his U.S. counterpart at a conference in Singapore at the weekend, using a speech there to attack Washington’s strategy in the Indo-Pacific. A Chinese warship crossed the bow of an American one in the Taiwan Strait at a distance of around 150 yards, the Pentagon said Saturday, as tensions simmered. Chinese Foreign Ministry spokesman Wang Wenbin criticized the U.S. for “sending warships halfway around the world to China’s doorstep in a provocative way,” at a regular press briefing in Beijing on Tuesday.

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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