The Precious Metals Week in Review – August 4th, 2023

1. U.S. equity futures struggled for direction as risk appetite cooled from last week’s rally. The yen weakened after the Bank of Japan made its first unscheduled bond purchases in months. Stock market activity was subdued on Monday, with investors taking a pause from the buying that sent the Nasdaq 100 Index up more than 2% last week. Gains in contracts for the S&P 500 and the Nasdaq 100, and in Europe’s benchmark index were limited to about 0.2%. It’s the start of another busy week of earnings, with Apple, and Amazon among those reporting in the coming days. There’s also key economic data on the way that may provide clues on the outlook for interest rates, including U.S. July non-farm payrolls numbers due Friday, a day after a policy decision from the Bank of England. Update: Total nonfarm payroll employment rose by 187,000 in July, and the unemployment rate changed little at 3.5 percent, the U.S. Bureau of Labor Statistics reported today. Job gains occurred in health care, social assistance, financial activities, and wholesale trade.

2. It’s never been more challenging to find an affordable home to buy in the US. High prices, a critical shortage of listings, and mortgage rates that have more than doubled from the record lows of just a couple years ago are forcing countless Americans to put their next moves and other major life decisions on hold. Gridlock is gripping the housing market in part because buyers and homeowners took advantage of historically low rates to purchase homes or refinance mortgages and lock in lower borrowing costs. More than nine of every 10 homeowners with mortgages, or 46.1 million people, have a rate below 6%, according to a June report from Redfin Corp. Those low rates have been an economic gift for many homeowners, a benefit that few want to give up. But for some owners, the situation has left them feeling stuck. A family stays in a house they’ve outgrown. A single mom is trapped in a costly fixer-upper. An empty nester’s dream of downsizing in the neighborhood she loves is fading. These struggles are playing out across the country at a time when property values have skyrocketed, borrowing costs have climbed and the inventory of existing homes is about half of what it was four years ago before the pandemic buying frenzy.

3. U.S. and European officials are growing increasingly concerned about China’s accelerated push into the production of older-generation semiconductors and are debating new strategies to contain the country’s expansion. President Joe Biden implemented broad controls over China’s ability to secure the kind of advanced chips that power artificial intelligence models and military applications. But Beijing responded by pouring billions into factories for the so-called legacy chips that haven’t been banned. Such chips are still essential throughout the global economy, critical components for everything from smartphones and electric vehicles to military hardware. That’s sparked fresh fears about China’s potential influence and triggered talks of further reining in the Asian nation. The U.S. is determined to prevent chips from becoming a point of leverage for China. The most advanced semiconductors are those produced using the thinnest etching technology, with 3-nanometers state of the art today. Legacy chips are typically considered those made with 28-nm equipment or above, technology introduced more than a decade ago. The importance of legacy chips was highlighted by supply shocks that muddied companies at the height of the Covid pandemic, including Apple and carmakers. Chip shortages cost businesses hundreds of billions of dollars in lost sales. Simple components, such as power management circuits, are essential for products like smartphones and electric vehicles, as well as military gear like missiles and radar. Heavy investments have allowed Chinese companies to keep supplying the West, despite being blacklisted by the American government.

4. Rating agency Fitch Ratings has downgraded the US debt rating from the highest rating of AAA to AA+, citing “a steady deterioration in standards of governance”. The downgrade was issued shortly after financial markets closed trading earlier Tuesday and has been criticized as being ‘arbitrary’ by the Secretary of the Treasury. The move could mean that borrowers are less likely to lend money to the federal government on favorable terms, potentially having an impact on taxpayers. In a statement, the rating agency said: ‘In Fitch’s view, there has been a steady deterioration in standards of governance over the last 20 years. Right now, the U.S. debt has surpassed $31 trillion and is expected to get near a level as a share of the overall economy that it hasn’t hit since the end of World War II.

5. ESG scoring and mandates remain a subject that has been contested since it sprang to life in 2020. ESG refers to the Environmental, Social, and Governance risk theoretically embedded in a business. However, while ESG investing is about considering these risks in investment decisions, these are all the things NOT on a company’s balance sheet or earnings statements. Following the financial crisis, ESG funds had roughly a zero-market share of total assets under management. In 2020, ESG-labelled funds in the United States exceeded $16 trillion. It was projected that these funds would exceed $50 trillion by 2025. However, the U.S., which accounts for 11 percent of ESG fund assets, saw outflows of $6.2 billion during the final quarter of 2022. To begin with, ESG funds certainly perform poorly in financial terms. Although the highest-rated funds in terms of sustainability certainly attracted more capital than the lowest-rated funds, none of the high-sustainability funds outperformed any of the lowest-rated funds. That result might be expected, and it is possible that investors would be happy to sacrifice financial returns in exchange for better ESG performance. Unfortunately, ESG funds don’t seem to deliver better ESG performance either. However, performance was always going to be the reason why ESG failed. The reason we know this is that we have seen these investment schemes before. In the late ’90s, Wall Street moved to limit investing in “sin” stocks such as gambling, tobacco, etc. Just as it was then, investors initially jumped on board, but when returns failed to outperform the benchmark index, that “fad” died. The same occurred in 2021 as investors who wanted to “feel good” about owning “disruptive” companies. That speculative demand changed quickly when performance failed. RBC Wealth Management surveyed over 900 U.S.-based clients recently. 49% said that performance and returns were a higher priority than ESG impact, up from 42% in 2021. RBC clients also expressed skepticism about the ESG label. 74% of those surveyed said many companies provided misleading information about their ESG initiatives. Environment or social issues may sound great as a talking point but delivering on those goals can be extremely costly. There is also some evidence provided by the Harvard Business Review that companies publicly embrace ESG as a cover for poor business performance. It was reported that when managers underperformed the earnings expectations (set by analysts following their company), they often publicly talked about their focus on ESG. But when they exceeded earnings expectations, they made few, if any, public statements related to ESG. Hence, sustainable fund managers who direct their investments to companies publicly embracing ESG principles may be over-investing in financially underperforming companies. In short, when companies are forced to make decisions based on meeting some phantom goal or agenda, those choices may not be in the company’s best interest.

6. Solar panels release five times more carbon dioxide than previously thought, according to a new report. An Italian researcher made the claims after finding a database that world institutions use to calculate global carbon footprint projections omits emissions from China, which produces 80 percent of solar panels worldwide. Without data from China, the Intergovernmental Panel on Climate Change (IPCC) claims the solar photovoltaic (PV) industry emissions are 48 gCO2/kWh. However, the new analysis suggests that the number is closer to 170 and 250 gCO2/kWh – 62.5 percent as much carbon dioxide emissions as natural gas electricity generation. The U.S., Japan, and Germany once dominated the solar panel manufacturing industry. However, regulations on coal use pushed the three powerhouses behind, letting China, which does not have guidelines take the top spot. Most solar cells comprise silicon semiconductors, glass, and metals like silver, copper, indium, and tellurium. However, some are designed with battery storage, which includes the use of lithium. According to the findings, the carbon intensity of solar panels manufactured in China and installed in European countries like Italy was off by an order of magnitude, according to Environmental Progress. A 2022 study by scientists at the National Renewable Energy Laboratory determined that emissions per module produced were twice as high in China than in the U.S. for crystalline silicon modules and some four times as high for Cadmium Telluride thin-film modules – a type of solar cell. A Clean Energy Buyers Institute report also shared a stark warning about China gaining dominance in the PV industry. Research determined that if the nation grows in solar manufacturing, the world will see up to 18 billion tons more carbon emissions by 2040, which would all be related to the PV industry. China is known to use coal-burning plants in manufacturing, which has dropped the price of technology for Americans and other Western countries.

7. U.S. employers added 187,000 jobs last month, fewer than expected and the smallest monthly gain since late 2020, as the labor market slowed in the face of higher interest rates. In the week ending July 29, the advance figure for seasonally adjusted initial claims was 227,000, an increase of 6,000 from the previous week’s unrevised level of 221,000. The 4-week moving average was 228,250, a decrease of 5,500 from the previous week’s unrevised average of 233,750. The advance number for seasonally adjusted insured unemployment during the week ending July 22 was 1,700,000, an increase of 21,000 from the previous week’s revised level.

8. Oil prices rose more than 1% on Wednesday, trading near their highest since April, after industry data showed a much steeper-than-expected draw last week in crude oil inventories in the U.S., the world’s biggest fuel consumer. Brent crude futures for October rose 92 cents, or 1.1%, to $85.83 a barrel by 0001 GMT, while U.S. West Texas Intermediate crude climbed 84 cents, or 1.03%, to $82.21 a barrel.

9. EUR/USD rose further during the American session, boosted by a weaker US Dollar. The Nonfarm Payrolls report came below expectations and weighed on the Greenback. The pair reached a five-day high at 1.1042. Fitch’s decision to downgrade the U.S. credit rating has turned attention to next week’s Treasury supply, though the USD’s safe haven appeal suggests that the impact of the Fitch decision is likely to be limited. Fed policy remains in the driving seat. While we expect that Fed funds are likely to peak, a higher for longer outlook is USD-supportive.

10. A potential advance to 145.00 in USD/JPY seems to be losing traction, comments from Markets Strategist Quek Ser Leang and Senior FX Strategist Peter Chia at UOB Group. The USD ‘could edge higher’, but any advance is expected to face solid resistance at 144.00. USD then rose to 143.89 before staging a surprisingly sharp pullback (the low was 142.05). The price actions appear to be part of a broad trading range.

U.S. job openings fell in June to the lowest level since April 2021, suggesting some softening in demand for workers in an otherwise resilient labor market. The number of available positions eased to 9.6 million in June, the Labor Department’s Job Openings and Labor Turnover Survey showed Tuesday, in line with the median estimate in a survey. Hiring fell to the lowest level since February 2021. But layoffs also declined to the lowest since the end of last year, suggesting employers are reticent to let go of staff. That bolsters the message from weekly filings for jobless claims, which have moderated in recent months, and an unemployment rate that remains historically low. The decline in openings was led by goods-producing sectors such as manufacturing, while several service industries, including health care and arts and entertainment, registered increases.

A U.S. recession is on the way, with a big upside for gold and major downside risks for equities and Bitcoin, according to Gareth Soloway, Chief Market Strategist and President of VerifiedInvesting.com. He said the recent U.S. growth data are misleading because they hide significant declines in imports. “To get the GDP number, you subtract out imports,” he said. “U.S. imports have fallen to their lowest level in quite a long time, and so the lower imports go, the less it subtracts from GDP, and will artificially raise GDP. So, it’s not to say that the economy is not expanding, but I think it’s a little bit on the false narrative side to say it’s expanding as rapidly as people are thinking.” “If you look at what precedes recessions, a drop in imports is one of those indicators that tells you something is amiss.” Soloway also sees dark clouds gathering over the U.S. employment landscape. “My fear is that we went through a period in COVID in 2020 where employers had so much trouble getting employees, that now that they have them, they’re very reluctant to let them go,” he said. “I think once we see the recession hit, which I would still expect late this year, early next year, I think that you’ll see a deluge of layoffs coming through, and we’ve already seen it in the tech sector. Then you also have to factor in the AI boom that’s coming.” “Listen, I love being an optimist,” Soloway said. “I think people, in general, should be optimists, but let’s be fair. The Federal Reserve has never engineered a soft landing in the history of themselves. What makes us think that this time when things are even crazier out there, this time is going to be that situation? There’s never been a soft landing. Not when you have this kind of scenario where the Fed has had to hike rates and try to land the economy. I mean, think about 2000. We still went into a recession, right? Think about 2007. You can go back to the 80s.” He said that part of the problem is that the Federal Reserve is always following lagging data, while also feeling pressure to get in front of the problem. “In recent periods, they talked about transitory inflation, and they basically were made the fool,” he said. “And so, what do they do? They overcompensate, which is very normal for all of us humans to do. We always overcompensate when we’re wrong on this side, but ultimately, they go too far on the other side and kick us into a recession.”

International purchases of U.S. homes slid to the lowest levels since the Great Recession as a strong dollar makes prices too steep for many. Foreigners acquired $53.3 billion in. residential properties in the 12 months through March, down 9.6% from a year earlier, according to a report out Tuesday from the National Association of Realtors. The number of homes purchased by foreigners was the lowest in data going back to 2009. “I was expecting foreign buyers to come back now that the Covid situation is mostly solved,” said Lawrence Yun, chief economist at NAR. “But the strong dollar didn’t contribute to that.” Florida was the most sought-out destination among international buyers, representing nearly one in four properties sold in the period. More than half of all Canadian buyers and four out of five Colombian buyers also bought real estate in the Sunshine State. Both Texas and Florida have grabbed a bigger share of the international market in the last five years. California’s share has fallen slightly since 2018, though it remained the favorite destination for buyers from China, Hong Kong, and Taiwan, who made up some 13% of all foreign buyers, more than double the share a year earlier.

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.

Friday to Friday Close (New York Closing Prices)

Month End to Month End Close

Previous Years Comparisons

Here are your Short-Term Support and Resistance Levels for the upcoming week.

This is not a solicitation to purchase or sell.
© 2023, Precious Metals International, Ltd.