The Precious Metals Week in Review – June 23rd, 2023

1. Stocks fell Monday as concern about the global economy and the path of rates sapped the strength of a blistering second-quarter rally. With the path of rates increasingly uncertain, traders are vacillating between the lure of the rally and concern it’s exhausted and the market has become overbought. Wall Street’s rally has now erased more than a year of Fed-induced losses, with stocks, volatility, and the dollar shaking off the impact of 10 rate hikes. The S&P 500 index just capped a fifth straight week of gains and is now higher than it was the day the Federal Reserve kicked off its campaign. “Optimism, or maybe just squeezed pessimists, is perhaps the strongest theme in global markets right now,” Giles Gale, rates strategist at NatWest Markets, wrote in a note. “Inflation looks surprisingly well behaved despite the Fed’s weak protests.” U.S. stock and bond markets are closed Monday for a holiday. Futures contracts on the S&P 500 and Nasdaq 100 dipped 0.2%. Looking ahead, Fed Chair Jerome Powell will give his semi-annual report to Congress on Wednesday. Federal Reserve Bank of St. Louis President James Bullard and his counterparts in New York and Chicago are among this week’s speakers. Policymakers at the Fed kept interest rates unchanged at their latest meeting but warned of more tightening ahead. The decision last week came with forecasts for higher borrowing costs of 5.6% in 2023, implying two additional quarter-point rate hikes or one half-point increase before the end of the year. “Markets are still pricing in a lower path of interest rates compared to the Federal Reserve’s dot plot,” said Janet Mui, head of market analysis at RBC Brewin Dolphin. “While we are close to peak rates, it is uncertain how long rates will stay high. Markets have a more dovish lens on that.” U.S. equities are in for a potentially tumultuous second half of the year as the lagging impacts of aggressive monetary tightening by the Federal Reserve catch up to the economy, according to JPMorgan Chase & Co.’s Marko Kolanovic.

2. On Thursday, the Bank of England unexpectedly raised its benchmark interest rate by a half percentage point, stepping up its fight against the worst bout of inflation since the 1980s and warning it may have to hike again. The nine-member Monetary Policy Committee voted 7-2 for an increase to 5%, the highest level in 15 years and the biggest move since February. Markets had priced in only a 40% chance of a half-point hike, with most economists anticipating a quarter point. The pound swung between gains and losses and gold gained after the decision as traders raised their expectations for further rate increases. The market is now pricing a 30% chance the key rate will peak at 6.25% by February, which implies another one-and-a-quarter point of hikes. If there were to be evidence of more persistent pressures, then further tightening in monetary policy would be required. The MPC will do what is necessary to return inflation to the 2% target. The decision announced Thursday suggests UK borrowing costs could keep rising through the summer even after the U.S. Federal Reserve paused its tightening spree. Britain remains an outlier in the Group of Seven nations, with consumer prices rising 8.7% in May, four times the BOE’s 2% target and more than double the rate in the U.S.

3. South Koreans can buy gold out of vending machines placed at convenience stores, and sales are surging, according to local media. The buyers are embracing the easiness of buying gold bars at vending machines, citing value appreciation and inflation concerns. In the nine months that ended in May, $19 million worth of gold bar sales were reported, said GS Retail, the company that operates the convenience stores. The gold dispensing vending machines were introduced at five of their stores back in September. Since then, this was expanded to 29 stores, with plans to reach 50 by the end of this year. Overall, GS Retail oversees more than 10,000 convenience stores across South Korea. The vending machines offer five weight options ranging between 0.13 and 1.3 ounces. The most popular gold bar has been the smallest one, which goes for around $225, the media report noted. The gold prices are updated daily, based on the international gold price. “People in their 20s and 30s appear to be the main buyers, purchasing physical gold as an investment vehicle, especially in times such as these, when its value is continuing to rise,” a GS Retail representative told UPI News Korea. With inflationary pressures and the banking turmoil in the U.S. weighing on consumers, more people in Korea started stocking up on gold, said Inha University Professor Lee Eun-Hee. “But a gold bar purchased at a convenience store seems more like something done for fun than as a means for serious investment. I believe the popularity of these gold bars is mainly due to their easy accessibility, at convenience stores no less,” she said. South Korea is not the first country to introduce this type of shopping experience, with the UAE selling gold via the Gold to Go vending machine.

4. Germany’s energy regulator will practice a large-scale emergency exercise with companies this September, testing their preparedness should gas supplies decrease. While Europe’s largest economy staved off a gas crisis last winter, it hasn’t yet called off the emergency status triggered in June previous year. Turbulent price swings this month have served as a reminder that supply risks remain. The country’s Economy Minister warned last week that Germany may still be forced to wind down or even switch off some industrial use if Ukraine’s gas transit agreement with Russia isn’t extended after it expires at the end of next year. Germany’s gas storage operators have also cautioned that storage sites could be entirely depleted by January 2024 — even if current low demand patterns persist. The one-day test is the first of its kind and should include different states, agencies, grid operators, gas suppliers and big industrial customers, a spokesman for the federal network agency said. The focus is on the agency’s communication and decision-making procedure in case of a bottleneck.

5. U.S. homebuilder sentiment advanced in June to an 11-month high as a limited supply of existing homes continued to spark interest in new construction. The National Association of Home Builders/Wells Fargo gauge rose five points to 55, figures showed Monday. The index, which has increased for six consecutive months, exceeded all estimates in a survey of economists. “A bottom is forming for single-family home building as builder sentiment continues to gradually rise from the beginning of the year,” Robert Dietz, NAHB chief economist, said in a statement. “The Federal Reserve nearing the end of its tightening cycle is also good news for future market conditions in terms of mortgage rates and the cost of financing for builder and developer loans.” The measure of sales expectations increased to the highest level since May of last year. Gauges of current sales and prospective buyer traffic both advanced to 11-month highs. The report also showed a quarter of the builders surveyed said they reduced home prices to bolster sales. That share is down from a peak of 36% in November and suggests demand is gradually recovering. Some 56% of respondents offered incentives to buyers this month, up slightly from the prior month but down from 62% at the end of last year. Builder sentiment increased in all four U.S. regions. Index readings above 50 indicate more builders view conditions as good than poor. Single-family home sales rose 11.8% in April from a year earlier, the most recent month available, according to the government.

6. The cooling housing market is making a dent in the equity wealth of U.S. homeowners accumulated during the pandemic. Owners with a mortgage lost a small amount of equity last quarter, down 0.7% from a year earlier. This marks the first annual decline since 2012, according to property data provider CoreLogic. The drop amounted to an average of $5,400 per borrower. But home-equity changes varied widely across regions. Western states posted the biggest losses, led by Washington, California, and Utah. In the San Francisco area, the typical homeowner experienced an equity loss of $174,000 year-over-year. By contrast, owners in six states, including Florida, Connecticut, and New Jersey, increased their equity positions by $20,000 or more, on average. Among the 46 states and the District of Columbia with available data, only 15 states had a loss from a year ago. Despite the recent declines, home equity remains solid nationally, thanks to the cushion of wealth built during the boom years of the pandemic, according to the report. The average homeowner today has more than $274,000 in equity, up from $182,000 before Covid-19.

7. Rio Tinto Group intends to invest about $920 million in its Kennecott copper operations in Utah as part of a plan to increase its supply in North America. Demand for the material is set to surge in the coming years due to the global energy transition. The company said it will invest $498 million to develop an underground mine and infrastructure in an area known as the North Rim Skarn, which will deliver about 250,000 tons of additional mined copper over 10 years next. Production from the other operation will begin in 2024 and will ramp up over two years, the company said in a statement. “We are investing to build a world-class underground mine at Kennecott and strengthen our processing facilities to meet the growing demand for copper in the United States,” Clayton Walker, the chief operating officer of Rio Tinto Copper, said in a statement.

8. U.S. unemployment benefit applications were unchanged last week at the highest level since October 2021, suggesting the labor market is cooling somewhat. Initial jobless claims held at 264,000 in the week ended June 17 after a slight upward revision to the previous week’s figures, according to a Labor Department report released on Thursday. This was above the median forecast of a survey of economists, who estimated 259,000 new claims. Continuing claims, which include those who have received unemployment benefits for more than one week, fell to 1.76 million in the week through June 10. The upward trend in claims follows recent layoff announcements in tech and banking and signs of a slowdown in demand for temporary workers.

9. The West Texas Intermediate (WTI) crude oil market experienced a week of volatility, influenced by a combination of supply dynamics and demand factors. This downturn was primarily triggered by the Bank of England’s bigger-than-expected rate hike, which raised concerns about the economy and fuel demand. Despite the support from a surprise draw in U.S. oil supplies, these worries outweighed the positive impact and pushed the U.S. benchmark lower. Brent crude traded at $73.35 per barrel or –1.07 at the time of writing on Friday.

10. The Euro (EUR) and other assets with risk associations remain on the defensive, although EUR/USD manages to regain some balance and seems to have set sail to the 1.0900 regions following the opening bell in Wall Street on Friday. Since reaching its highest point above the psychological barrier of 1.1000 earlier this month, the currency pair has already dropped by more than one cent. The Euro’s decline was intensified by disappointing figures from the advanced Manufacturing and Services Purchasing Managers’ Indices (PMIs) in France, Germany, and the broader Euroland for June. These poor results reignited concerns about a possible recession in the region.

11. The USD/JPY pair is struggling to maintain stability above the crucial resistance of 143.00 in the London session. Earlier, the asset printed a fresh eight-month high at 143.45 after getting strength from the upbeat US Dollar Index (DXY). However, further upside looks gloomy as investors are hoping for a stealth intervention by the Bank of Japan (BoJ) to provide some cushion to the weak Japanese Yen.

Federal Reserve Chair Jerome Powell will have an opportunity this week to clarify what many found a confusing message on the path of interest rates; with the added task of assuring Democrats and Republicans the economy is on track. The Fed chief will face questions from lawmakers on Wednesday and Thursday, his first testimony on Capitol Hill since early March, before banking-sector turmoil prompted sharp criticism of the Fed and forced officials to rethink their policy strategy. Since then, the most acute financial strains have eased, but questions remain about the extent to which tighter credit will weigh on the economy, and what that means for the Fed. Powell will need to reassure Republicans the Fed is not backing down from its campaign to contain price pressures while pointing Democrats to the resilience of the economy as officials prepare to raise rates further this year. “The Democrats are nervous because they would rather declare victory and move on,” said Stephen Myrow, a former George W. Bush Treasury official. “I think they’re going to try to caution this time against further increases. But Republicans are just going to hammer away and act like inflation hasn’t come down.” Fed watchers and investors struggled to digest the message from Powell’s post-meeting press conference, and lawmakers last week said they planned to press him for an explanation. While Fed officials strive to be independent of the political process, they’re also well aware of the bipartisan concerns that the central bank has already done a lot.

Distress is spreading in the U.S. commercial real estate industry, with the number of troubled assets climbing to nearly $64 billion in the first quarter of this year. The number of distressed assets rose 10% in the first three months of the year, according to a new report. Risks loom on the horizon too, with nearly $155 billion of commercial property assets that are potentially troubled, according to the report. Higher borrowing costs have pummeled the commercial real estate industry, driving prices lower and causing some owners to choose to default. Much of the potential distress is tied to buildings that need refinancing at a time when lenders are tightening credit following the collapse of several regional banks. “Should this potential distress be upgraded to full-blown trouble, an increase in distressed asset sales and declining prices would be inevitable,” MSCI Real Assets researchers including Jim Costello and Alexis Maltin wrote in the report. Retail properties including malls were the most troubled type of real estate, with nearly $23 billion of distressed assets tied to the sector. About $18 billion of office buildings were considered distressed at the end of March, according to the report. Offices, which are also struggling with weaker demand given the rise in remote work and job cuts, account for nearly $43 billion of potential distress, the most of any sector. Offices face a bigger wave of maturing debt while distress in retail appears to be cooling.

In New York and London, owners of gleaming office towers are walking away from their debt rather than pouring good money after bad. The landlords of downtown San Francisco’s largest mall have abandoned it. A new Hong Kong skyscraper is only a quarter leased. The creeping rot inside commercial real estate is like a dark seam running through the global economy. Even as stock markets rally and investors are hopeful that the fastest interest-rate increases in a generation will ebb, the trouble in property is set to play out for years. After a long buying binge fueled by cheap debt, owners and lenders are grappling with changes in how and where people work, shop and live in the wake of the pandemic. At the same time, higher interest rates are making it more expensive to buy or refinance buildings. A tipping point is coming: In the US alone, about $1.4 trillion of commercial real estate loans are due this year and next, according to the Mortgage Bankers Association. When the deadline arrives, owners facing large principal payments may prefer to default instead of borrowing again to pay the bill. It took six years for U.S. office prices to recover after the 2008 financial crisis, even though that episode was centered on residential real estate. “This time we think it’ll take 10 years,” says Richard Barkham, global chief economist for CBRE Group Inc. Commercial real estate’s woes will add to the stress on a financial system that’s already reeling from this year’s crisis in regional banks. And as the downturn deepens, it stands to have a transformational impact on some cities as they contend with empty buildings and lower property tax revenue.

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 seek 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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