The Precious Metals Week in Review – July 7th, 2023

1. The Nasdaq 100 erased early gains after the tech-heavy benchmark notched its best-ever first half of a year while bonds climbed after a measure of U.S. factory activity contracted. Tesla gained 6.9% after the electric car company reported record quarterly sales, leading shares of rivals and battery suppliers higher. Chipmaker Nvidia and the online retail giant Amazon were among other stocks supporting the tech index while the S&P 500 wobbled. While central banks have kept up their hawkish rhetoric, signs of moderating U.S. inflation have fueled big gains across technology shares. Investors are tempering expectations for stocks in the second half of the year after strong gains so far. Treasuries advanced after a gauge of manufacturing fell to their weakest level in more than three years. Production and new orders data also suggested a pullback. The yield on the five-year note fell 3 basis points to 4.14%. If an economic slump does not materialize and political crises can be averted inflation could bottom out at 3% before resuming a climb, according to Jim Bianco, president of Bianco Research. “If the inflation rate bottoms at three and starts drifting higher, the Fed’s going to find this unacceptable, and that two rate hikes that we have priced in for the rest of the year will happen, if not three,” Bianco said.

2. U.S. factory activity contracted for an eighth month in June, slipping to the weakest level in more than three years as production, employment, and input prices retreated. The Institute for Supply Management’s manufacturing gauge fell to 46, the weakest since May 2020, from 46.9 a month earlier, according to data released Monday. The current stretch of readings below 50, which indicates shrinking activity, is the longest since 2008-2009. The reading was also worse than all but one estimate in a survey of economists. The decline in the ISM production gauge, which also fell to the lowest level since May 2020, suggests demand for merchandise remains weak. Many Americans continue to limit their spending on merchandise as they rotate to services and experiences. Others are simply tightening their belts as still-high inflation takes a toll on their incomes.

3. OPEC kept oil production steady in June as the cartel pressed on with an accord aimed at shoring up a fragile global market. The Organization of Petroleum Exporting Countries pumped an average of 28.57 million barrels a day, a modest increase of 80,000 a day from May. June was the second month of a round of supply curbs that some members had put in place to offset shaky economic growth. Output ought to decline in July as Saudi Arabia, OPEC’s biggest producer, deepens its supply reduction with a unilateral cutback of 1 million barrels a day. Despite first predictions for a rally this year, oil prices have instead sagged about 12% so far in 2023 amid a lackluster post-pandemic recovery in China and fears that rising interest rates will trigger a global recession. Saudi Arabia needed prices of more than $80 a barrel even before its latest wave of output curbs to balance its budget, according to the International Monetary Fund.

4. China imposed restrictions on exporting two metals that are crucial to parts of the semiconductor, telecommunications, and electric-vehicle industries in an escalation of the country’s tit-for-tat trade war on technology with the U.S. and Europe. Gallium and germanium, along with their chemical compounds, will be subject to export controls meant to protect Chinese national security starting Aug. 1. Exporters for the two metals will need to apply for licenses from the commerce ministry if they want to start or continue to ship them out of the country and will be required to report details of the overseas buyers and their applications. China’s move comes as the Asian nation battles for technological dominance in everything from quantum computing to artificial intelligence and chip manufacturing. The U.S. has taken increasingly aggressive measures to keep China from gaining the upper hand and has called upon allies in Europe and Asia to do the same, with some success. The export limits are also coming at a time when nations around the world are working to rid their supply chains of dependencies on overseas equipment. “It will be disruptive – germanium and gallium are absolutely critical to high-tech industries,” said Anthony Lipmann, a director of London metals trader Lipmann Walton & Co. China accounts for about 94% of the world’s gallium production, according to the UK Critical Minerals Intelligence Centre. The move comes after the U.S. and its allies stepped up rhetoric against China in recent weeks. President Joe Biden’s administration is planning to block sales of some chips used to run artificial intelligence programs.

5. Companies have spent the best part of a decade taking advantage of ultra-low interest rates to refinance their debt, resulting in some of the smallest levels of leverage and the healthiest balance sheets in years. But Citigroup analysts are warning that in early 2023, some measures of leverage are ticking up once again. “The first signs of a re-leveraging cycle have surfaced in the U.S. high-grade market,” write strategists Daniel Sorid and James Keefe in a note published on Wednesday. “If recent history is a guide, the trend is not our friend.” While many investors have been waiting for the $10.4 trillion corporate bond market to buckle under the strain of higher interest rates, it’s been slow-going so far. Still, there are signs that that’s changing, says Citi: “Corporate fundamentals are beginning to deteriorate as the economic environment becomes more challenging yet remains broadly healthy,” the analysts write. As earnings “growth has stalled, this has led to a subtle rise in the gross and net leverage of investment-grade issuers over the past year.” Citi expects spreads, or risk premiums, on investment-grade bonds to end the year around 135 basis points. They’re currently at 122 basis points, suggesting markets may still be too optimistic. The big question facing credit investors is how long the market can continue to withstand higher interest rates and whether earnings momentum will eventually slow down. “Cracks are beginning to show,” the Citi strategists added.

6. In the week ending July 1, the advance figure for seasonally adjusted initial claims was 248,000, an increase of 12,000 from the previous week’s revised level. The previous week’s level was revised down by 3,000 from 239,000 to 236,000. The 4-week moving average was 253,250, a decrease of 3,500 from the previous week’s revised average. The previous week’s average was revised down by 750 from 257,500 to 256,750.

7. Nonfarm payrolls increased 209,000 last month, less than economists expected, and job gains over the prior two months were revised lower, a Bureau of Labor Statistics report showed Friday. The unemployment rate fell to 3.6%. Average hourly earnings rose 4.4% from a year earlier, and the average workweek edged up.

8. Oil prices climbed about 2% to a six-week high on Friday as supply concerns outweighed fears that further interest rate hikes could slow economic growth and reduce demand for oil. Brent futures rose $1.21, or 1.6%, to $77.73 a barrel by 11:06 a.m. EDT (1506 GMT). U.S. West Texas Intermediate (WTI) crude rose $1.23, or 1.7%, to $73.03. Both benchmarks were on track for their highest closes since May 24 with Brent up about 4% for the week and WTI headed for a weekly rise of about 3%.

9. EUR/USD gathered bullish momentum and advanced to the 1.0950 area during the American trading hours on Friday. The U.S. Dollar stays under persistent selling pressure following the disappointing Nonfarm Payrolls data, fueling the pair’s rally ahead of the weekend.

10. USD/JPY dives to nearly a two-week low amid risk-off, eyes 143.00 ahead of U.S. NFP (Non-Farm Payrolls). The USD/JPY pair remains under heavy selling pressure for the second successive day on Friday and drops to a nearly two-week low.

The time has now come for the 99.5% of financial assets which are not invested in gold, silver, or precious metals mining stocks to grab both the investment and wealth preservation opportunity. As you have already joined that exclusive group of 0.5% of global financial assets which are invested in precious metals, you understand what is coming. As the Western Empire is breaking up currently, the Eastern & Southern Empire is gaining ever more significance. More than 30 countries want to join the BRICS Nations (Brazil, Russia, India, China, and South Africa) and many also the SCO (Shanghai Cooperation Organization). There is also the Eurasian Economic Union (EEU) which has existed since 2014 and consists of several ex-Soviet Union States. The enlarged group will consist of more than 40 countries and represent around 2/3 of the global population and 1/3 of the global GDP. The Soviet Foreign Minister Lavrov has just announced that Iran will join the SCO on July 4 and that Belarus will also become a full member. At some point, these three groupings might be merged into one, with gold playing a central role. It is not expected that there will be one gold-backed currency at a fixed parity, but rather that gold will float at a much higher value than currently with a link to BRICS currencies.

There was a time when the U.S. dollar was “As Good as Gold” and until August 1971, sovereign nations could exchange dollars for gold at $35 per ounce. But sadly, most leaders of countries or corporations eventually resort to greed when real money runs out. So, this is what Nixon did in 1971 when he closed the gold window. Despite falling 98% in real terms since 1971, the dollar has remained both the preferred reserve currency and the currency of choice for global trade. As the West now sinks into a quagmire of debt, corruption, and decadence, the world will potentially experience a tectonic shift away from fiat/fake money with zero intrinsic value to currencies backed by commodities with gold playing a leading role. So, buying anything commodity-based will be a clear growth area for decades.

There has not been a major gold discovery for 4 years. Major gold discoveries over 1 million ounces:

1990s – 180
2000s – 120
2010 to 2018 – 40
2019 to date – 0

Not only do we have peak oil but also peak gold. So, the world is facing a vicious cycle of increasing energy costs leading to higher costs of extracting precious metals and other commodities. This confirms that high inflation is here to stay, leading to higher interest rates and a very high risk of debt defaults within the private and sovereign sectors. The trust in the U.S. and the dollar is now coming to an end after the confiscation of all Russian assets. So, we are not facing a dollar crisis. Instead, the dollar and its issuer are the crisis. No one who is worried about preserving their wealth would ever consider holding it in a crisis currency, controlled by a crisis government.

The U.S. and China are trying to find better ways to disagree. Treasury Secretary Janet Yellen touched down in Beijing today, the second cabinet member to visit the capital in recent weeks after Secretary of State Antony Blinken’s trip. That visit was aimed at smoothing over ties following an alleged Chinese surveillance balloon that was shot down over the U.S. Yellen may be seeking to get to know her newly appointed counterparts, but actually repairing ties is still likely well out of reach, U.S. support for Taiwan, which Beijing claims as part of its territory, remains one source of tension among many. Both countries have retaliatory darts aimed at one another. Beijing this week introduced controls over two metals used in chipmaking and telecommunications. President Joe Biden’s administration is working on an executive order that would curb U.S. investment in China covering sensitive technologies including semiconductors, artificial intelligence, and quantum computing. There are some possible mutual wins on the table, perhaps over China’s debt relief to distressed sovereign borrowers or climate change, but the threat of still more technology restrictions can’t be ignored. And that makes it near impossible for either side to forge a constructive working relationship. The best hope, then, is for Washington and Beijing to use their improved communication channels to learn how to compete, without triggering conflict.

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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