The Precious Metals Week in Review – July 21st, 2023

1. Gross domestic product in China grew at a slower-than-expected pace of 6.3% in the second quarter, adding to risks for the global economy, reliant on Chinese spending. “Many countries do depend on strong Chinese growth to promote growth in their own economies, particularly countries in Asia, and slow growth in China can have some negative spillovers for the United States,” Treasury Secretary Janet Yellen said in an interview on Monday. “Growth has slowed, but our labor market continues to be quite strong. I don’t expect a recession.” For a time, analysts believed Chinese shoppers coming out of Covid lockdowns would be able to carry the global economy, despite rising U.S. and European interest rates. However, that narrative is looking increasingly shaky. Yellen said she sees the U.S. on a “good path” to bringing down inflation without a major weakening in the labor market. The inflation data announced last week has fueled hopes that it has reached a turning point in the inflation cycle and reinforced expectations for a ‘disinflationary soft landing’. A big question in investment markets currently is: can this ‘Goldilocks’ situation of not-too-hot and not-too-cold data continue? The next pressure point for markets will be earnings, with hundreds of companies reporting over the next few weeks.

2. It just may have been the week that broke the dollar. The greenback’s worst slump since November has a bevy of strategists and investors saying a turning point is finally at hand for the world’s primary reserve currency. If they’re right, there will be far-reaching consequences for global economies and financial markets. The U.S. currency is teetering at the lowest level in more than a year after signs of cooling inflation bolstered bets that the Federal Reserve will soon stop hiking interest rates. Dollar bears are looking even further ahead, to what they say are inevitable rate cuts, something the market consensus sees happening at some point in 2024. “Our call for the dollar to enter a multi-year downtrend is partly based on the fact that the Fed’s tightening cycle will morph into an easing cycle, and this will pull the dollar down even as other central banks cut as well,” Steven Barrow, head of G-10 strategy at Standard Bank, said. It’s hard to overstate the potential ripple effects of a long-term greenback slide. It would reduce import prices for developing nations, helping ease their inflation pressures. A greenback reversal also stands to bolster currencies like the yen, which has been tumbling for months and upend popular trading strategies tied to a weaker yen. More broadly, a softer U.S. currency would tend to boost American firms’ exports at the expense of their counterparts in Europe, Asia, and elsewhere. Of course, there’s a long history of investors getting burned by premature bets on Fed rate cuts that would sink the dollar. That was the case early this year when the currency seemed to be on the verge of a protracted downtrend only to stabilize as U.S. economic data drove home that the Fed wasn’t about to stop hiking. For the bears, the threat is that dynamic repeats itself, especially with the Fed likely to tighten further as soon as this month. “From a valuation perspective, the dollar is still very overvalued,” said Paresh Upadhyaya, director of currency strategy at Amundi Asset Management. “I think markets are going to start to face that.”

3. On Tuesday we saw growing expectations and new momentum for the gold market as prices tested another important resistance point. Gold prices have pushed to a seven-week high, with August gold futures currently trading at $1,979.90 an ounce, up 1.2% on the day. According to some market analysts, this could be the start of a new push to $2,000 an ounce. Julia Cordova, founder of Cordovatrades.com, said that gold’s price action is forming a technical bull-flag pattern, and a weekly close above $1,973 would be a breakout move. She added that the next resistance level to watch would be around $2,017 to $2,020. She said that this level could be tested as early as next week. James Stanley, market strategist at StoneX, said that the gold bulls are in complete control of the market. He added that he is also watching the $2,000 level closely. According to analysts, gold is catching a bid as markets expect next week will be the Federal Reserve’s last rate hike in this tightening cycle. The market has pretty much fully priced in a 25-basis point move next Wednesday. Naeem Aslam, chief investment officer at Zaye Capital Markets, said that he expects next week’s rate hike to be the Federal Reserve’s last, which will continue to support gold prices. “We think that there is a clear understanding among market players that next week the Fed will fire the last bullet from its gun— from there onwards, conversations will only be about the ongoing pause and a possible rate cut taking place. We believe all of that will be highly positive for the gold price,” he said.

4. Americans are increasingly tapping their greatest source of wealth, getting Home Equity Lines of Credit (HELOC) to borrow against the value of their properties, which skyrocketed in the pandemic real estate rally. HELOCs have become more popular as mortgage rates surged from record lows, making cash-out refinancing unattractive to most homeowners. In recent years, lenders scarred by the financial crisis kept a tight grip on Helocs, which are considered relatively risky for banks because the credit line functions as a “second lien” that’s paid off after primary mortgage obligations. But 30-year loan costs at almost double early 2022 levels have squashed the refi boom, making financial institutions more open to Helocs, said Greg McBride, chief financial analyst at Bankrate.com. “The phones in the mortgage refinance department aren’t ringing,” he said. “The way to get equity out of the home has swung to the Heloc.” Typically, there’s an upfront fee for opening a HELOC, but interest doesn’t accrue until the funds are used. And for homeowners sitting on a mountain of equity, it can end up being a costly option. The rates are often variable, determined by broader lending conditions, meaning the Federal Reserve’s aggressive inflation-fighting campaign can increase costs for borrowers. Still, it’s a way for people who have seen the value of their homes increase to get access to cash, especially for those who missed the refinancing boom when borrowing costs were low during the pandemic. In 2022, annual Heloc originations rose 34% from the prior year to 1.41 million individual loans. That was the highest total since 2008, according to credit reporting agency TransUnion.

5. Two major Chinese chip equipment makers are predicting a doubling in profits after the U.S. clamped on exports of American technology, forcing manufacturers to rely on homegrown alternatives. Advanced Micro-Fabrication Equipment Inc. said net income for the first half likely grew between 110% and 120%. Peer Naura Technology Group Co. reported on Friday a 121% to 156% increase in profit to as much as 1.93 billion yuan ($270 million) during the same period. Beijing is accelerating a campaign to replace foreign tech and achieve self-sufficiency in key areas including semiconductors, as U.S.-led multinational export controls start to cripple China’s ability to develop advanced chips. The Chinese government is prioritizing the building of a domestic chip supply chain to try and move past those sanctions and ensure it has enough semiconductors to power its economy.

6. U.S. bank regulators are set to release their plans next week for a sweeping overhaul of capital rules, with the latest draft including requirements for large lenders’ residential mortgages that go beyond international standards. The changes would be part of the U.S. version of a global accord known as Basel III that followed the financial crisis. The plans are poised to be unveiled on July 27 by the Federal Reserve, the Federal Deposit Insurance Corp., and the Office of the Comptroller of the Currency, according to three people familiar with the proposal who asked not to be identified discussing details before the announcement. Although regulators have said big Wall Street banks might face a 20% average increase in overall capital requirements, the focus on large lenders’ residential mortgages hasn’t been mentioned. The U.S. had been expected to keep these mortgages in line with the international framework. For large banks, the agencies wanted to go above the global standards for residential mortgages, as well as some business loans, to avoid giving those lenders a competitive advantage over smaller peers. The industry will almost certainly criticize the proposal as another onerous measure to “gold plate” U.S. requirements by making them more stringent than global standards. Banks have complained for years that reforms after the 2008 financial crisis gave an unfair advantage to less-regulated non-bank lenders. And they’ve warned that additional requirements risk raising borrowing costs at a time when the dream of home ownership has become more elusive for average Americans. Risk weights aren’t the amount of capital that banks need to hold. Instead, they are percentages assigned to account for the risk of various types of assets. Higher risk weights apply to assets that regulators consider to be greater risks. In the U.S., a 50% risk weight is now assigned to many first-lien residential mortgage loans. Now, federal regulators are considering applying risk weights of 40% to 90% for large banks, depending on the loan-to-value ratio, according to one of the people. Riskier loans, with higher LTV ratios, would get the higher risk weights. The proposed risk weights across the board are 20 percentage points higher than those in the Basel III international framework.

7. In the week ending July 15, the advance figure for seasonally adjusted initial claims was 228,000, a decrease of 9,000 from the previous week’s unrevised level of 237,000. The 4-week moving average was 237,500, a decrease of 9,250 from the previous week’s unrevised average of 246,750. The previous week’s level was revised down by 8,000 from 1,729,000 to 1,721,000. The 4-week moving average was 1,731,500, a decrease of 1,750 from the previous week’s revised average.

8. In a week of turbulent trade, U.S. benchmark September West Texas Intermediate (WTI) crude oil futures have managed to hold their ground, indicating a potential higher finish for the week. Thursday’s session saw WTI crude oil prices settling slightly higher, thanks to lower U.S. crude inventories and strong crude imports by China. However, the market sentiment remained somewhat restrained due to concerns about a weaker demand outlook. Brent futures rose 3 cents to $79.67 a barrel, while U.S. West Texas Intermediate (WTI) crude climbed 9 cents to $75.74 a barrel. Both benchmarks had gained for three consecutive weeks.

9. The euro has pulled back during the week, as we are trying to figure out whether or not we can continue to go higher. The 200-Day EMA offers a bit of psychological and technical support, right along with the fact that it is where we had previously seen resistance. It’s possible that we could see quite a bit of support at the psychologically important 1.10 level as well, so I do think that it is probably only a matter of time before we see buyers coming back into the picture.

10. USD/JPY jumps to nearly 142.00 amid a cautious market mood. Fed-BoJ policy divergence is expected to widen further as the BoJ is expected to continue its dovish stance. Japan Statistics Bureau released National Consumer Price Index (CPI) for June, rising to 3.3% YoY from 3.2% versus 3.5% expected on early Friday. The recently downbeat Japan inflation data justifies Thursday’s defense of the Bank of Japan’s (BoJ) ultra-easy monetary policy by Japan Prime Minister (PM) Fumio Kishida.

Treasury Secretary Janet Yellen said a cooling, but not faltering labor market is playing a key role in helping to slow inflation, among a raft of factors imposing disinflationary pressures. “The intensity of hiring demands on the part of firms has subsided,” Yellen said Tuesday in an interview. “The labor market’s cooling without there being any real distress associated with it.” Along with job-market shifts, Yellen cited housing costs and vehicle prices as factors that are likely to keep pushing down cost pressures. She also suggested that corporate profit margins could play a role. At the same time, she urged against excessive optimism based solely on June’s consumer price data. The improvement in the inflation landscape comes as welcome relief for Yellen and the Biden administration after they bungled the issue in 2021. Yellen initially said the burst in prices triggered by the pandemic would be “transitory,” a forecast she later characterized as a mistake. The improvement in US inflation trends has contrasted with suggestions of outright deflationary risks in China. The Treasury chief on Monday said while China’s slowdown could have negative spillovers, she still saw the U.S. averting a recession. Yellen has consistently said it’s possible to bring inflation back to the Fed’s 2% target without a spike in joblessness, a view that has been seen as overly optimistic in some quarters.

U.S. equities and Treasuries fell Thursday as investors digested a round of disappointing tech earnings and fresh signs of labor-market resiliency that could support another hike in interest rates this year. The tech-heavy Nasdaq 100 fell 1.6%, with Netflix set for its biggest intraday decline of the year after issuing a disappointing revenue forecast. Tesla slid after profitability shrank in the second quarter. And the yield on 10-year Treasuries rose 12 basis points in light trading as an unexpected drop in weekly initial jobless claims prompted traders to price in higher odds of a quarter-point rate hike beyond the Federal Reserve’s meeting next week. “In the last 24 hours alone there has been talk of a worsening of the conflict in Ukraine, a further slowdown in China, and major U.S. banks facing significant real estate losses,” Lewis Grant, senior portfolio manager at Federated Hermes, wrote in a note. “Each of these threats, along with uncountable unknowns, has the potential to halt the sentiment rebound in its tracks.” On Wednesday, wheat prices surged following an escalation of tensions between Russia and Ukraine in the Black Sea. Goldman Sachs Group had reported a plunge in profits. And early Thursday, China had stepped up its support for the yuan amid a ramp-up in rhetoric to bolster business confidence. Against such a backdrop, returns on the back of a handful of tech stocks are “overdone” and maybe the precursor to a downturn, Aegon Asset Management strategist Cameron McCrimmon warned. “The breadth of returns on the S&P 500 has become increasingly narrow, driven by a few mega-cap tech stocks on AI optimism, which is a classic sign of an aging bull.”

Some of the forecasters who were first out of the box to predict a U.S. recession are starting to hedge their bets as inflation ebbs and the economy remains resilient. The sentiment was echoed in a July survey of economists, in which estimates for gross domestic product were revised higher for the second and third quarters. However, forecasters still say there’s a 60% chance the U.S. will fall into recession in the next 12 months. The survey of 73 economists, conducted from July 14-19, was taken just after the latest CPI report showed the inflation rate slid in June to a more than two-year low. That prompted many traders to bet that next week’s expected interest-rate hike by the Fed will be the last of this cycle. “The Fed is likely to skip September after a July hike. The next opportunity in November will likely take place against the background of a recession, as real rates become more restrictive,” Philip Marey, senior strategist at Rabobank, said in a survey response. “Therefore, we do not expect the second hike in the dot plot to materialize.” Economists in the survey also now expect fewer rate cuts from the Fed next year.
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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