The Precious Metals Week in Review – June 16th, 2023

1. Federal Reserve officials are rethinking their view that wage gains are fueling inflation, a key intellectual shift that bolsters the case for a pause in their tightening campaign this week. Until recently, many top policymakers at the U.S. central bank maintained that the road to lower inflation ran through the job market. The idea was that workers would need to feel some “pain” in the form of smaller wage increases for inflation to be brought under control. But new research and commentary from officials and economists suggest the link between wages and prices may not be so direct. And it’s arriving just as the Fed is nearing the likely end of what has been a historic cycle of interest-rate increases over the past 15 months. Fed officials last month authorized a 10th straight increase in the central bank’s benchmark interest rate, taking it above 5% for the first time since 2007, and signaled they may stop raising rates at this week’s policy meeting. That signal came despite inflation’s slow progress in returning to its 2% target after reaching a four-decade high in 2022. The latest consumer price index figures are due Tuesday, and forecasters expect them to show core inflation, excluding food and energy, moderated to 5.2% in May from a year earlier. The government’s latest monthly jobs report, meanwhile, offered mixed signals on the strength of the labor market, with job creation topping forecasts even as average hourly earnings in the 12 months through May rose at the slowest pace in nearly two years.

2. As the U.S. Treasury Department refills its General Account by selling assets, $1 trillion in liquidity could be drained from markets. This, in turn, could “break” markets and cause a sell-off. “Any way you look at it, it [the Treasury] is tightening,” warned James Lavish, co-Managing Partner at the Bitcoin Opportunity Fund Lavish told Michelle Makori, Editor-in-Chief at Kitco News. “We could have some sort of liquidity event, some sort of credit event, that causes a sharp sell-off.” He said that the credit event would be an unexpected “Black Swan,” which would take investors by surprise. The Treasury Department needs to raise funds to replace its cash balance, which fell from $723.3 billion to $44.8 billion over one year as the Treasury used its funds to fulfill government spending obligations. The Treasury General Account, which is the federal government’s operating account, was used to fulfill these obligations during debt ceiling negotiations in Congress. The Treasury needs $550 billion by the end of the month, as well as enough cash to fulfill retirement programs and other obligations. In total, Goldman Sachs, and JP Morgan estimate that the Treasury needs around $1 trillion by the end of Q3 of 2023. To raise funds, the Treasury intends to sell assets, including short-dated T-bills. “The worst-case scenario would be that we issue so much debt so quickly that the Treasury market locks up, that we don’t have enough liquidity,” Lavish suggested. “I do expect there’s… probably a decent chance that we still have some sort of credit event though. I think that the Fed is going to hold rates here with maybe one more rate raise,” he forecast. “And so, I believe we’re going to see a sharp rise in unemployment at some point here, and that could be pretty ugly. I’ve been opportunistically buying gold and Bitcoin as the price has dipped,” he confirmed. “I’m accumulating positions in those and hiding my assets there from the economic turmoil I believe is coming.”

3. The crypto industry is running out of ground to stand on, particularly in the U.S. Since the price of Bitcoin tumbled off its exuberant high in late 2021, the bear market in digital assets has often been described as a “crypto winter.” That’s not bleak enough to capture what’s happened. In quick succession, crypto has seen financial contagions, multiple cases of alleged fraud and outright theft, the collapse of several trading and lending platforms, and the evaporation of about $1.8 trillion in market value across all coins. Through it all, regulators including the U.S. Securities and Exchange Commission have steadily ramped up enforcement actions, with hints of more to come. The agency contends that many of the business practices people in crypto took for granted during the boom years are not legal in the U.S. The suits take on the world’s two largest crypto trading platforms, Binance and Coinbase, accusing both of running unregistered securities exchanges and brokerages. And if its arguments prevail against these two companies, the impact could be far wider, reining in the activities of other trading platforms and perhaps forcing cryptocurrency creators to register their tokens as securities if they want them to be tradeable in the U.S. In other words, some of the frantic crypto tradings that people raced to get in on was an illusion, the SEC says. Treating coins as securities could force big changes at exchanges that choose to list them. The SEC says that both Binance and Coinbase combine the functions of an exchange, a brokerage, and a clearing agency. In the securities business, those functions are typically split among separate legal entities, to avoid conflicts of interest.

4. According to two people familiar with the matter, the U.S. plans to purchase about 12 million barrels of oil this year as it begins to refill its depleted emergency reserve amid falling crude prices. The figure includes 3 million barrels already scheduled for delivery in August and an additional 3 million barrels from a solicitation the Biden administration issued on Friday, according to the people. An Energy Department spokesperson said they will continue to “seek opportunities for additional repurchases as market conditions and the constraints of SPR operations allow.” The more than 700 million barrel-capacity Strategic Petroleum Reserve is at a 40-year-low following a historic 180-million-barrel drawdown last year in response to Russia’s invasion of Ukraine. Oil traders have been closely watching while the government begins refilling the emergency stockpile, as its purchases are bound to tighten the market. Any added pull-on domestic barrels could send oil prices higher, potentially raising gasoline prices in the middle of the summer driving season and possibly dissuading the Biden administration from replenishing the reserve in larger quantities.

5. Canadians’ mortgage borrowing hit the lowest level since 2003 amid higher interest rates. The report suggests higher borrowing costs are weighing on many households’ ability to access credit, though residential real estate prices recovered during the quarter as inventory remained constrained. The slowdown in the net growth in mortgage debt coincides with one of the Bank of Canada’s most aggressive ever campaigns to raise borrowing costs. After declaring a conditional pause in January, policymakers boosted the benchmark overnight rate to 4.75% last week as household expenditures continued to grow. Some of the weakness in net mortgage debt accumulation could also be the result of households deciding to pay down their mortgages in a higher-rate environment. The report may raise questions about whether home purchases are being increasingly financed by non-mortgage means. The release also showed Canadians remain among the most indebted people in the world: The ratio of household credit market debt-to-income rose to 184.5%, up from 181.7% in the previous quarter. The debt service ratio rose to 14.9%, the highest since 2019.

6. In the week ending June 10, the advance figure for seasonally adjusted initial claims was 262,000, unchanged from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 261,000 to 262,000. The 4-week moving average was 246,750, an increase of 9,250 from the previous week’s revised average. This is the highest level for this average since November 20, 2021, when it was 249,250. The previous week’s average was revised up by 250 from 237,250 to 237,500.

7. September West Texas Intermediate (WTI) crude oil futures experienced another volatile week, culminating in a 3% increase to reach a one-week high on Thursday. Several factors contributed to this rise, including a weaker U.S. dollar and a significant surge in refinery runs in China, the world’s top crude oil importer. This positive performance helped the market recover from earlier losses, which puts it in a position to end the week on an upward trajectory. Brent crude futures eased 27 cents, or 0.4%, to $74.01 a barrel by 0019 GMT. U.S. West Texas Intermediate crude was at $69.13 a barrel, down 29 cents, or 0.4%.

8. EUR/USD continues to trade in a tight daily range at around 1.0950 on Friday. The upbeat UoM consumer sentiment data for June and Wall Street’s mixed action following the opening bell helps the US Dollar hold its ground, not allowing the pair to gain traction.

9. The USD/JPY reached its highest level since November 2022, hitting 141.57 following the release of positive US economic data. However, the pair has been unable to consolidate above the 141.50 area. Data released on Friday showed Consumer sentiment in the US improved in early June measured by the University of Michigan’s (UoM) Consumer Confidence Index rose to 63.9 from 59.2 in May, surpassing the market expectation of 60.

Binance Holdings Ltd. said it is leaving the Netherlands after failing to register with the country’s financial authorities, as the world’s largest cryptocurrency exchange faces escalating pressure from regulators across the globe. “With immediate effect, no new users residing in the Netherlands will be accepted,” Binance said in a statement on Friday. Starting Saturday, Binance will only process withdrawals for existing Dutch resident users, it said. The Dutch Central Bank last year fined Binance for offering crypto services in the Netherlands without the required registration with the monetary authority. Dutch authorities ruled in May 2020 that any company seeking to offer crypto services in the Netherlands must comply with the country’s laws against money laundering and terrorism financing. The company said on Friday that it couldn’t obtain registration as a virtual asset service provider “although we explored many alternative avenues to service Dutch residents in compliance with Dutch regulations.” Binance vowed to continue trying to secure authorizations to operate in the Netherlands.

U.S. inflation continues to cool, giving the Federal Reserve room to take a breather from interest-rate hikes this week. The details offer signs it might become a full stop. The consumer price index rose 4% in May from a year earlier, marking the smallest advance since March 2021. Core services inflation excluding housing, a category many forecasters see as key to the outlook, receded to the slowest pace in 15 months. For the Fed, officials can breathe a sigh of relief at the beginning of a two-day policy meeting that Tuesday’s data came in as expected. While they will acknowledge that inflation remains well above their 2% target, the US central bank is still on track to skip a rate increase on Wednesday after 10 straight hikes, a decision which may very well turn into an extended pause. “This CPI report is everything the Fed needs to pause — there is deflation and/or disinflation in every category,” Jamie Cox, managing partner at Harris Financial Group, said in a note. “If this trajectory holds in June, the need for further tightening is behind us.” Fed officials like to look at an even narrower category of core inflation, services excluding housing, to assess the trajectory of the stickiest price pressures. That metric climbed 0.2% from a month earlier, according to calculations, which are in line with pre-pandemic trends. It was up 4.6% from a year ago, representing ongoing moderation after peaking late last year. Several Fed policymakers, including Chair Jerome Powell, have signaled they prefer to skip a rate hike at the June 13-14 policy meeting, while still leaving the door open to future tightening if needed. And regardless of whether or not the Fed hikes again, it’s likely to resist cutting rates any time soon.

Federal Reserve officials paused their series of interest-rate hikes, but projected borrowing costs will go higher than previously expected, owing to what Chair Jerome Powell called surprisingly persistent inflation and labor-market strength. Powell, speaking to reporters in a press conference Wednesday, faced the challenging task of explaining two possibly contradictory policies: deciding to leave rates unchanged following 10 straight hikes while also indicating that at least two more increases might be necessary this year, with the first possibly as soon as July. Policymakers on Wednesday left rates in a range of 5% to 5.25%, taking their first breather in a 15-month hiking campaign that included four jumbo-sized 75-basis-point increases last year.

Investor fears of mounting economic damage threaten to overshadow the next round of interest-rate hiking all but promised by central bankers from Washington to Frankfurt. With Federal Reserve Chair Jerome Powell flagging a potential further half-point in increases and his European Central Bank counterpart Christine Lagarde saying another quarter-point step is “very likely,” a pivotal week in the monetary calendar has left financial markets starting to count the cost that incessant tightening may inflict.

As the Federal Reserve decides whether to tighten the money supply further, corporate treasurers are scrambling to cope with the impact of more than a year of central bank rate hikes, taking steps like cutting costs and paying down debt. Interest costs at U.S. companies rose by 22% in the first quarter compared to a year earlier, soon after the Federal Reserve started raising rates, according to a recent survey of about 1,700 businesses. Those increases, alongside higher costs elsewhere, including for wages, materials, and energy, are forcing companies to look for savings. Apple, for example, is taking steps like delaying bonuses for some divisions and scaling back hiring to keep costs in check. A move by the Federal Reserve to keep rates “higher for longer” will likely put more pressure on companies with weaker credit ratings. For bigger businesses with higher ratings, sustained high borrowing costs will likely bring a gradual decline in interest coverage ratios and a focus on right-sizing outstanding debt and balance sheets. But, as most companies hold significantly more debt than cash, higher interest income often isn’t sufficient to compensate for the rise in interest rates.

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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