The Precious Metals Week in Review – July 28th, 2023

1. The gold market, while off its recent highs, continues to hold support well above $1,950 an ounce as the U.S. housing market continues to struggle as fewer consumers than expected are buying new homes. New-home sales declined in June for the first time in four months, suggesting high borrowing costs and prices are restraining momentum in the market. The gold market is not seeing much reaction to the disappointing housing data as it holds in positive territory. Purchases of new single-family homes fell 2.5% to an annualized 697,000 pace after a downward revision to the prior month, government data showed Wednesday. The median estimate in a survey of economists called for a 725,000 rate. Even with the decline, sales have rebounded over the past year thanks to a limited inventory of existing homes. That explains why homebuilder sentiment is at the highest level in 13 months, and contractors are applying to break ground on more single-family projects. Still, high borrowing costs and elevated prices continue to pose affordability challenges. The median sales price of a new home declined to $415,400 from a year earlier, but that’s well above pre-pandemic levels. The number of homes sold in June and awaiting the start of construction, a measure of backlogs rose to the highest level since February 2022. There were 432,000 homes for sale as of the end of last month, in line with earlier readings this year. That represents 7.4 months of supply at the current sales rate.

2. Global bonds climbed, and stocks posted small moves Monday after weak economic data in both the U.S. and Europe fueled concern about a global slowdown. Investors were wary of making big equity bets at the start of a week packed with major central bank policy decisions and corporate earnings. In Europe, advance readings of the Purchasing Managers’ Indexes showed the private-sector economy contracted more than anticipated in July in the euro area and slowed sharply in Britain. U.S. business activity expanded in early July at the slowest pace in five months as services growth moderated. The data highlights the quandary for policy-setters, with traders positioning for the Federal Reserve and the European Central Bank to raise interest rates this week and to signal whether more hikes are likely after record tightening campaigns. Equity markets, meanwhile, are looking into their busiest earnings week this season, with more than 500 major companies worldwide due to report quarterly results, including Megacaps such as Alphabet, and Meta Platforms. The next few days will be crucial for investors, who will be watching to see if slowing economic momentum shows up on profit margins.

3. A new BRICS currency probably isn’t going to be announced in the near term, but recent geopolitical events make a gold-backed alternative to the U.S. dollar more attractive to the bloc, according to Lobo Tiggre, editor of The Independent Speculator. Tiggre said he believes the statements from Anil Sooklal, the South African ambassador to BRICS. “There’s never been talk of a BRICS currency, it’s not on the agenda” for the August summit in Johannesburg. “If the people hosting the conference were telling you this is not on the agenda, I think that is not too much of a stretch to take that at face value,” Tiggre said. India’s apparent shift in sentiment against a bloc currency is a bigger hurdle. “The Indian statement in a way is a bigger shocker,” he said. “The South African ambassador, he’s just saying it’s not on the agenda. [India] said they don’t favor a BRICS currency at all, so they still need persuading even to get in that boat. That’s a bigger hurdle to come up against.” He said it’s not surprising that Russia is pushing hard for a BRICS alternative to U.S. dollar dominance and that Russia’s attempts to create the impression that the new currency was imminent also served their purposes. “Even just talking about it, propaganda has all kinds of value in a war setting, so it’s easy to see an interest on their part in pushing an idea that would do any harm to their enemies, no matter how much or how little,” he said. “Words are cheap. It’s easy to talk. This is a country at war,” Tiggre said. “This is a country that, if not at war directly with the West, got smacked down when the dollar was so-called ‘weaponized.’ So, of course, they have an incentive.” Despite the development that a gold-backed joint currency is off the agenda, for now, Tiggre supports the idea conceptually. “I think what gives this idea so much power, and why it grabs so many people, is because it actually does make sense … and the gold-backed part even makes sense.”

4. Wall Street’s biggest banks are preparing for new regulations that could erase almost all of the $118 billion in excess capital they squirreled away over the past decade, likely crimping shareholder buybacks for years to come. The Federal Reserve and the Federal Deposit Insurance Corp. will vote on Thursday to propose the measures during two separate open meetings, marking the first hurdle in putting the U.S. on track to adopt its final version of international banking standards known as the Basel III endgame. The changes are part of a sweeping review that Michael Barr began as one of his first acts as the Fed’s vice chairman for supervision. Taken together, they mark the biggest revamp of capital rules for U.S. banks since the aftermath of the financial crisis. Though the proposals likely won’t be implemented for years, they have already drawn criticism from top bank executives. In the meantime, investors are increasingly worried about how the stricter requirements will affect lenders’ ability to repurchase shares. Six of the country’s biggest banks, JPMorgan Chase, Bank of America, Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs are currently sitting on an estimated $118 billion in so-called excess common equity tier 1 capital. But that cushion would be almost completely wiped out if Barr implements proposals that would result in the equivalent of an additional two percentage points of capital. “The guys that will be extra penalized will be the Wall Street banks,” Arnold Kakuda, an analyst said in an interview. Trading businesses “will be hit especially hard.” The Fed’s bank supervision chief has said that while he does see a need to more closely monitor risks outside of the regulated financial sector, he doesn’t believe the answer is lower capital requirements for banks.

5. The European Central Bank lifted interest rates by another quarter-point while keeping options for the next meeting open as its unprecedented hiking campaign nears an end. As economists expected, a ninth straight increase since last July brought the deposit rate to 3.75% on Thursday. The lack of guidance for September’s decision means the ECB may rise again, or hold, depending on the strength of its conviction that inflation is headed back to the 2% goal. “Future decisions will ensure that the key ECB interest rates will be set at sufficiently restrictive levels for as long as necessary,” the ECB said in a statement. “The Governing Council will continue to follow a data-dependent approach to determining the appropriate level and duration of restriction.”

6. In the week ending July 22, the advance figure for seasonally adjusted initial claims was 221,000, a decrease of 7,000 from the previous week’s unrevised level of 228,000. The 4-week moving average was 233,750, a decrease of 3,750 from the last week’s unrevised average of 237,500.

7. Oil prices were steady on Friday, but on track for a fifth straight week of gains with investors optimistic healthy demand and supply cuts will keep prices buoyant. Risk appetite in wider financial markets has been fueled by growing expectations that central banks such as the Fed and European Central Bank are nearing the end of policy tightening campaigns, boosting the outlook for global growth and energy demand. Bolstered by supply cuts from the OPEC+ alliance announced earlier this month, both oil benchmarks are on track for a 3.6% weekly increase – a fifth straight week of gains. By 1400 GMT, Brent crude slipped 39 cents to $83.85 a barrel, while U.S. West Texas Intermediate (WTI) crude dipped 33 cents to $79.76 a barrel. Both benchmarks fell by as much as $1 briefly earlier in the session.

8. EUR/USD manages well to rebound from earlier 3-week lows in the 1.0945/40 band and reclaim the area just beyond 1.1000 the figure at the end of the week. Considering the recent price action, extra weakness should not be discarded. Once the weekly low of 1.0943 (July 28) is cleared, further losses could extend to the transitory 55-day and 100-day SMAs (Simple Moving Average) just above the 1.0900 mark. Looking at the longer run, the positive view remains unchanged while above the 200-day SMA, today at 1.0718.

9. USD/JPY is trading around 139.50, recovering ground following a dip to 138.00. The Yen holds the rebound on the BoJ’s pledge to guide YCC with great flexibility. The BoJ (Bank of Japan), however, maintained its ultra-loose policy. US PCE (Personal Consumption Expenditure) inflation data eyed. The Yen is choppy but holds gains after BoJ allows the 10Y yield to rise as high as 1%. Economists at Scotiabank analyze the JPY outlook.

On Wednesday, the Federal Reserve raised interest rates to the highest level in 22 years and Chair Jerome Powell said additional increases will depend on incoming data as officials fine-tune their effort to further quell inflation. The quarter-percentage-point hike, a unanimous decision, lifted the target range for the Fed’s benchmark federal funds rate to 5.25% to 5.5%, the highest level since 2001. It marked the 11th increase since March 2022, when the rate was near zero. Powell said the data could justify either holding rates steady or raising them again at the Fed’s next meeting in September. He said policymakers haven’t made any decisions about future moves, including whether they are now inclined to raise rates at every other meeting. “We’re going to be going meeting-by-meeting,” he said, adding that officials will be looking for moderate growth, improving inflation, and supply and demand coming into better balance, particularly in the labor market. The latest hike was widely anticipated after recent reports showed a resilient economy that has largely withstood higher interest rates so far. But ahead of Wednesday’s decision, investors saw a second increase as less certain, in part because of data on consumer prices showing inflation receded sharply last month.

JPMorgan Chase sees an opportunity in gold ahead of a likely U.S. recession, predicting prices will push past $2,000 an ounce by year-end and hit fresh records in 2024 as interest rates start to fall. Falling real yields will be a “significant driver” for the precious metal when the Federal Reserve starts to deploy rate cuts, which should play out in the second quarter of next year, Greg Shearer, executive director of global commodities research, said in an online briefing on Wednesday. Gold has rallied around 15% over the past 12 months, supported by signs that the U.S. rate-hiking cycle was nearing an end, buying by central banks, and bouts of safe-haven demand. In early May, it approached its record high of $2,075.47 an ounce, set in 2020. The bank has an average price target of $2,175 an ounce for bullion in the final quarter of 2024, with risks skewed to the upside on a forecast for a mild U.S. recession that’s likely to hit sometime before the Fed starts easing. “We’re in a very prime place where we think gold ownership and long allocation to gold and silver is something that acts as both a late cycle diversifier and something that will perform as we look to the next sort of 12, 18 months,” Shearer said.

Economists now see a soft landing for the Canadian economy, with no recession this year despite interest rates at a 22-year high. The economy will stall in the second half of 2023, but it will not contract, according to a monthly survey of 27 economists. The median forecast sees the Bank of Canada holding its overnight rate at 5% well into next year — with no rate cuts until April. The results support the Bank of Canada’s view that economic growth is moderating, while core inflation remains elevated. Governor Tiff Macklem said this month that policymakers are trying to balance the risks of over- and under-tightening and avoid “making economic conditions unnecessarily painful for everybody.” Unexpected strength in household spending earlier this year prompted the central bank to raise rates in June and July after a brief pause. But growth in consumption spending is projected to slow over the next year, as demand for rate-sensitive goods and services weakens and more households renew their mortgages at higher rates.

U.S. economic growth unexpectedly picked up steam in the second quarter thanks to resilience among consumers and businesses in the face of high-interest rates. Gross domestic product rose at a 2.4% annualized rate after a 2% pace in the previous three months, the Commerce Department’s initial estimate showed Thursday. Consumer spending increased at a 1.6% pace, more than forecast, after surging at the start of the year. The economy is in better shape than economists had expected it would be just a few months ago. While forecasters are split on the odds of a recession, a strong labor market, sturdy consumer spending and now easing inflation have fueled hopes that the U.S. will avoid a downturn.

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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