The Precious Metals Week in Review – June 30th, 2023

1. U.S. stocks wavered while an earlier advance in government bonds moderated as investors weighed whether central banks could navigate ongoing inflation-fighting campaigns while skirting a recession. The S&P 500 was little changed after the gauge suffered its worst week since March. The defensive healthcare sector dragged on the benchmark with Pfizer as one of the worst performers after the drugmaker stopped the development of a weight-loss pill over safety concerns. Traders are finally relenting on their bets that the Federal Reserve will cut interest rates this year after Fed Chair Jerome Powell last week warned the U.S. may need one or two more rate increases in 2023. Investors have been growing more anxious that central banks determined to extinguish inflation will keep pushing rates higher and risk breaking fragile economies. “As central banks remain hawkish on the back of persistent inflationary pressure, the likelihood of a soft landing is falling,” said Andrew McCaffery, global chief investment officer at Fidelity. “Investors should be wary of taking on too much risk at this late stage of the cycle.”

2. The underwhelming boost from China’s reopening has left the world’s trade engines sputtering and searching for new sources of growth. Six of the 10 indicators on the Trade Tracker remained in a below-normal range in mid-June, regressing to their prior level after a slight improvement in May. Trade flows are struggling to sustain a meaningful resurgence, despite headline numbers showing increased shipping volumes and muted input costs. A New York Federal Reserve supply chain pressure gauge recently clocked its most deflationary reading in 20 years of data. Much of that is due to the somber global growth outlook. The U.S. and Europe are facing higher interest rates and economic contraction, while hopes for a post-Covid China rebound have largely failed to materialize. Record debt, tepid demand, and pessimism are damping industrial and consumer activity on the mainland, causing knock-on effects not just in Asia but beyond. If you put those pieces together, you’ve got weak growth in all of the major exporting and importing economies — of course, that’s going to take a bunch of pressure off supply chains.

3. In South Korea, the latest craze has been buying gold bars from vending machines, though gold bar dispensing machines first appeared in 2010 in Abu, Dhabi, UAE. Despite taking 13 years for South Korea to catch up, for the first nine months of 2023, GS retail stores in South Korea have reported $19,000,000 in gold bar sales to retail customers, with the most popular bar a 0.13 troy ounce bar that is approximately $250 at current prices. Unlike the perception gold has in the West as an “old person’s” investment, the majority of South Korean buyers are in their 20s and 30s. Gold has always been money with all Asians, both young and old, though the banking cartel in nations in the West has been extremely successful in positioning gold as a “barbarous relic” only suitable for people in their 70s or above. Of course, mainstream media financial analysts have marginalized this South Korean gold bar buying spree as a fad that will fade over time among the young, as buying gold from vending machines is just the “cool thing” to do at the moment. Even South Korea Inha University Professor Lee Eun-hee recently displayed her ignorance of sound money principles and the reasons why young adults in South Korea are turning to gold to preserve the purchasing power of their savings when asked about the $19M in sales of gold from vending machines this year. Despite the global currency system being on the verge of a game-changing shift due to every non-NATO nation expressing a desire to escape the boot of USD (US Dollar) hegemony in stifling their national economies, and movements away from the Belgium SWIFT system and USDs in international trade, the Bank of Korea (BOK) has expressed a desire not to increase the paltry 1.14% of overall reserves it holds in gold and to remain committed to the USD, likely due to its NATO ties and commitment to the Military Industrial Banking complex over the well-being of its own citizens.

4. U.S. office buildings are unlikely to regain their peak pre-pandemic values until at least 2040 as demand for desk space weakens, according to a forecast by Capital Economics. Values are expected to plunge 35% from the peak by the end of 2025 and take an additional 15 years or more to recover as hybrid and remote work reshape real estate, the London-based research firm reported Thursday. It’s a trend that mirrors the collapse of shopping malls as e-commerce grew. “Demolitions and conversions of the worst assets may partially counteract the impact on valuation-based indices,” economist Kiran Raichura wrote. “But ultimately landlords will have to bear those costs, so the road ahead for office owners is set to be an arduous one.” Major institutional investors, including Brookfield Corp. and Blackstone Inc., have already defaulted on some office buildings, choosing to stop loan payments rather than spend more on money-losing properties. About $18 billion of office buildings were considered distressed at the end of March, MSCI Real Assets said in a report Thursday, estimating almost $43 billion of offices are at risk of default. Office usage is only about half what it was before the pandemic, according to data from Kastle Systems.

5. China’s tech sector has a new obsession: competing with U.S. titans like Google and Microsoft in the breakneck global artificial intelligence race. Billionaire entrepreneurs, mid-level engineers, and veterans of foreign firms alike now harbor a remarkably consistent ambition: to outdo China’s geopolitical rival in a technology that may determine the global power stakes. Among them is internet mogul Wang Xiaochuan, who entered the field after OpenAI’s ChatGPT debuted to a social media firestorm in November. “We all heard the sound of the starter pistol in the race. Tech companies, big or small, are all on the same starting line,” Wang said. “China is still three years behind the U.S., but we may not need three years to catch up.” The top-flight Chinese talent and financing flowing into AI mirror a wave of activity convulsing Silicon Valley, which has deep implications for Beijing’s escalating conflict with Washington. Analysts and executives believe AI will shape the technology leaders of the future, much like the internet and smartphone created a corps of global titans. Moreover, it could propel applications from supercomputing to military prowess, potentially tilting the geopolitical balance. China is a vastly different landscape, one reined in by U.S. tech sanctions, regulators’ data and censorship demands, and Western distrust that limits the international expansion of its national champions. All that will make it harder to play catch-up. AI investments in the U.S. dwarf that of China, totaling $26.6 billion in the year to mid-June versus China’s $4 billion, according to previously unreported data collated by consultancy Preqin.

6. In the week ending June 24, the advance figure for seasonally adjusted initial claims was 239,000, a decrease of 26,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 264,000 to 265,000. The 4-week moving average was 257,500, an increase of 1,500 from the previous week’s revised average. This is the highest level for this average since November 13, 2021, when it was 260,000. The previous week’s average was revised up by 250 from 255,750 to 256,000.

7. WTI (West Texas Intermediate) crude oil futures have witnessed a period of choppy and rangebound trading over the last 10 weeks, influenced by various supply and demand factors. This week was no different. September West Texas Intermediate crude oil futures settled higher on Thursday after flip-flopping during the session. The move was enough, however, to turn the market higher for the week, heading into the last day of the month and quarter. As of the time of writing WTI crude was trading at $70.93 per barrel with Brent Crude at $ 74.99 per barrel.

8. EUR/USD gathered recovery momentum and rose above 1.09000 in the American session on Friday. After the data from the U.S. showed the PCE inflation rose at a softer pace than expected in May, the U.S. dollar came under renewed selling pressure, helping the pair push higher. EUR/USD is expected to climb towards 1.14 by late 2024 according to Wells Fargo.

9. The USD/JPY pair finds some support near the 144.45 area and stalls its intraday retracement slide from its highest level since November 2022 touched this Friday. Spot prices currently trade around 144.55-144.60 region, nearly unchanged for the day, and seem poised to prolong its recent well-established uptrend witnessed over the past three weeks or so.

China is falling into a “balance-sheet recession” and needs to ramp up fiscal stimulus quickly to address the challenge, according to the economist who coined the phrase to explain Japan’s descent into stagnation in the 1990s. China needs to keep cutting rates, roll out more stimulus, and clarify the role it wants the private sector to play in the economy to restore confidence and help growth, a former International Monetary Fund official said. The People’s Bank of China will need to further ease monetary policy this year should the country’s economic recovery continue to lose steam, according to Eswar Prasad, the former head of the IMF’s China division. “The PBOC has already undertaken a couple of very modest moves, but I view those really as signaling that if the economy stumbles, then the PBOC is ready to act much more forcefully,” Prasad said Wednesday. Market anticipation for more policy support has been growing in recent weeks as the economic rebound increasingly shows signs of weakening. Those expectations were further fueled earlier this month when the PBOC cut policy interest rates, the first trim to those rates since last August. The State Council, China’s cabinet, has said it’s studying new measures but hasn’t announced any stimulus package so far. Sluggish consumer and business confidence is also a pain point for the economy, having been battered by years of Covid controls. Regulatory crackdowns have fueled concerns about unpredictable policy changes, further weighing on corporate activity.

Nvidia’s powerful semiconductors have taken on importance as their capacity to fuel artificial intelligence has become increasingly sought-after. But their unique ability is also what made China hawks in the U.S. fearful about what it could mean for them to get into the wrong hands, where it could be used to accelerate the spread of non-democratic ideas or develop autonomous weapons. “If the democratic side is not in the lead on the technology, and authoritarians get ahead, we put the whole of democracy and human rights at risk,” Eileen Donahoe, a former U.S. ambassador to the U.N. said in a recent interview. With U.S. AI executives warning the government that China is not far behind in its development of transformative technology, U.S. policymakers believe there’s deep urgency to take steps to stay ahead. That’s why the Commerce Department is reportedly considering new limits on the export of such chips to China. Such a move would continue the ongoing standoff between the U.S. and Chinese governments on technology sales between the two countries. U.S. limitations on the sale of chips with AI capacity to China would make it harder for China to keep up with the pace of development of the sector by U.S. companies like Google and Microsoft-backed OpenAI. While Chinese companies may have some added advanced chips saved up or resort to slower semiconductors, further limits on high-speed chips could limit their agility in the AI race.

The Federal Reserve’s preferred measures of U.S. inflation cooled in May and consumer spending stagnated, suggesting the economy’s main engine is starting to lose some momentum. The personal consumption expenditures price index rose 0.1% in May, Commerce Department figures showed Friday. From a year ago, the measure eased to the slowest pace in more than two years. Consumer spending, adjusted for prices, was little changed after a downwardly revised 0.2% gain in April. From February through May, household spending has essentially stalled after an early-year surge. Spending on merchandise dropped, while outlays for services increased. Excluding food and energy, the so-called core PCE price index increased by 4.6% from May 2022. That’s in line with annual readings back to late 2022 and shows minimal relief from elevated price pressures. Economists consider this to be a better gauge of underlying inflation. While there are some glimmers of progress in the inflation data, the rate remains well above the Fed’s 2% target. Considering that, central bank officials have signaled they’re anticipating having to increase interest rates two more times this year — potentially beginning with next month’s meeting.

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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