The Precious Metals Week in Review – August 11th, 2023

1. The Federal Reserve Governor Michelle Bowman said Monday morning that she expects to raise interest rates higher despite cooler reports on jobs and inflation recently. “I supported raising the federal funds rate at our July meeting, and I expect that additional increases will likely be needed to lower inflation to the FOMC’s goal.” Fed officials raised interest rates for the eleventh time since March 2022 in what may be the first of two rate hikes that officials have penciled in for the remainder of the year. Wall Street is betting that July’s rate hike will mark the Fed’s last before holding rates at the current level into the first half of next year. Going forward, Bowman says she will be looking for evidence that inflation is on a consistent and meaningful downward path as she considers whether to raise rates further and how long rates will need to remain at a sufficiently restrictive level. While Bowman says she’s encouraged by the recent inflation readings from the Consumer Price Index (CPI) and the Personal Consumption Expenditures (PCE) Price Index, she says that inflation remains well above the Fed’s 2% target. Elsewhere, New York Fed President John Williams also said that supply and demand in the job market are coming back into better balance and that the Fed is close to the peak on rates. “To me, the debate is really about: Do we need to do another rate increase? Or not? Now, that could change, depending on the data,” Williams said. “Whether we need to adjust it in terms of that peak rate, but also how long we need to keep a restrictive stance — is going to depend on the data.” John Williams sees the need to keep U.S. monetary policy restrictive for some time and said interest-rate cuts may be warranted next year if inflation slows.

2. Financial developments in the Russian and Chinese axis are being generally ignored. The confirmation by Russia that a trade settlement currency for an expanded BRICS is on the agenda at the Johannesburg summit later this month has barely been reported, and even sound money advocates are highly skeptical. But all will be revealed in three weeks’ time. Meanwhile, a gold standard could return in the wake of a new gold-backed trade settlement currency, if that is what emerges, using the currency board model as a template. The availability of above-ground gold stocks to support a global retreat from fiat currencies back to the stability of legal money, gold, is being assessed. The conclusion is that with bullion having migrated in vast quantities from the West to the East in recent decades, there is a deficit for the fiat-committed Western alliance and nations in its sphere of influence to back their own currencies. All the vibes coming out of the Russian and Chinese axis strongly point to a new gold-linked trade settlement currency being proposed. In the Western alliance, economists and investors alike will have to re-educate themselves about how the relationship between gold and credit works, and what is required to ensure that the link between them endures. This is the basis of BRICS+: a new industrial revolution for emerging nations willing to join in. Cementing these prospects will not be Keynesian stimulation. It will be sound money, which means credible gold standards. And a gold-backed trade settlement currency will be the first step.

3. Bitcoin and other cryptocurrencies continued to languish at depressed levels on Monday in what has become one of the quietest periods for crypto in recent history. Past trends suggest prices could soon fall, and this week may usher in a fresh catalyst. The price of Bitcoin has retreated less than 1% over the past 24 hours to just above $29,000. The largest digital asset continues to inch further away from the psychologically important $30,000 level, which has formed the bottom end of a range that provided support for Bitcoin prices for months. “With Bitcoin’s short-term realized volatility at historically low levels, the market seems to be in a ‘wait and see’ mood,” said Yuya Hasegawa, an analyst at crypto exchange Bitbank. “The next stop could be around $28,000 and given the market’s heightened concerns … recovery above $30,000 in the next couple of days is likely off the table.” Digital assets have fallen into a lull in recent months, and a period of stagnant trading has appeared. “The third quarter is historically Bitcoin’s weakest so things might well get worse in the coming weeks before they get better,” said Antoni Trenchev, managing partner at crypto lender Nexo. “On the downside, Bitcoin can fall to $25,000 and it wouldn’t be a travesty but ideally it needs to stay above the 200-week moving average around $27,300 as it tends to tell us if Bitcoin is in a bullish or bearish trend.” The days ahead could bring a fresh catalyst to crypto markets in the form of U.S. consumer-price index (CPI) inflation data, due Thursday. The data also are likely to move the Dow Jones Industrial Average and S&P 500. U.S. inflation and the resulting pathway for Federal Reserve monetary policy have a similar bearing on cryptos as they do stocks, both of which are rate-sensitive risk assets, so the CPI print may move the needle, though traders aren’t getting their hopes up.

4. Western microchips used to power smartphones and laptops are continuing to enter Russia and fuel its military arsenal, a new analysis shows. Trade data and manifests show that Moscow has been sourcing an increased number of semiconductors and other advanced Western technologies through intermediary countries such as China. In 2022, Russia imported $2.5 billion worth of semiconductor technologies, up from $1.8 billion in 2021. Semiconductors and microchips play a crucial role in modern-day warfare, powering a range of equipment including drones, radios, missiles, and armored vehicles. “Russia is still being able to import all the necessary Western-produced critical components for its military,” said Elina Ribakova, a senior fellow at the Peterson Institute for International Economics. “The sanctions evasion and avoidance are surprisingly brazen at the moment,” she added. In the study, more than two-thirds of the foreign components found in Russian military equipment ultimately originated from companies headquartered in the U.S., with others coming from Ukrainian allies including Japan and Germany. The burgeoning trade flows have prompted calls from Western allies to either get more countries on board with sanctions or slap secondary sanctions on certain entities operating within those countries in a bid to stifle Russia’s military strength. In June 2023, the European Union adopted a new package of sanctions which includes an anti-circumvention tool to restrict the “sale, supply, transfer or export” of specified sanctioned goods and technology to certain third countries acting as intermediaries for Russia. Others say that responsibility ultimately lies with the companies, which need to do more to monitor their supply chains and avoid their goods falling into the wrong hands.

5. Moody’s cut credit ratings of several small to mid-sized U.S. banks on Monday and said it may downgrade some of the nation’s biggest lenders, warning that the sector’s credit strength will likely be tested by funding risks and weaker profitability. Moody’s cut the ratings of 10 banks by one notch and placed six banking giants, including Bank of New York Mellon, US Bancorp, State Street, and Truist Financial on review for potential downgrades. “Many banks’ second-quarter results showed growing profitability pressures that will reduce their ability to generate internal capital,” Moody’s said in a note. “This comes as a mild U.S. recession is on the horizon for early 2024 and asset quality looks set to decline, with particular risks in some banks’ commercial real estate (CRE) portfolios.” Moody’s said elevated CRE exposures are a key risk due to high-interest rates, declines in office demand as a result of remote work, and a reduction in the availability of CRE credit. The downgraded banks by Moody’s include M&T Bank, Pinnacle Financial Partners, Prosperity Bank, and BOK Financial Corp.

6. In the week ending August 5, the advance figure for seasonally adjusted initial claims was 248,000, an increase of 21,000 from the previous week’s unrevised level of 227,000. The 4-week moving average was 231,000, an increase of 2,750 from the previous week’s unrevised average of 228,250.

7. The rise in oil prices last month pushed the price of Russia’s flagship crude grade, Urals, to above $60 per barrel for the first time since the G7 and the EU cap came into effect at the end of last year. Strong demand in China sent the price of Russia’s ESPO crude blend surging to the highest in eight months at the end of July. The ESPO discounts to Brent were at their narrowest since the EU embargo on Russian oil imports kicked in. At the time of writing on Friday Brent crude was trading at $87.30 per barrel with WTI (West Texas Intermediate) at $83.71 per barrel.

8. The EUR/USD pair finishes the week on the downside, although losses were modest, with the pair still close to the 1.1000 threshold. Financial markets struggled for direction amid uncertainty surrounding the economic future, not setting a directional path. The mixed United States monthly employment report released by the end of the previous week revived concerns about whether the US Federal Reserve (Fed) would continue hiking rates or not, as the Nonfarm Payrolls (NFP) report showed the Unemployment Rate fell to 3.5% in July, while wages increased.

9. The USD/JPY pair is marching towards the critical resistance of 145.00 in the London session. The asset rallies due to underperformance from the Japanese Yen. The major struggles to continue its four-day winning streak as investors await the United States Producer Price Index (PPI) data for further guidance.

Inflation in the U.S. has ticked up to a 3.2 percent annual rate – rising slightly in July from June’s 3 percent annual increase. It is the first time in 13 months that the Consumer Price Index has accelerated on a yearly basis. Prices rose 0.2 percent on a monthly basis, driven mainly by shelter costs, which include rent. This accounted for 90 percent of the monthly increase, according to the Bureau of Labor Statistics. However, this modest monthly rise is the same rate as in June, which could possibly deter the Federal Reserve from raising interest rates again in September. The monthly increase was also in line with projections, while the annual rate was slightly below the 3.3 percent forecast. The 3.2 percent annual inflation rate is a sharp decrease from the 9.1 percent peak seen last June but is still considerably above the Federal Reserve’s target rate of 2 percent. However so-called core consumer prices, which exclude volatile items such as food and energy and are deemed a better gauge of long-term trends, continued to show cooling. For the 12 months that ended in July, core CPI rose 4.7 percent – down from 4.8 percent in June. This is the fourth consecutive month this figure has eased – and the rate landed 0.1 percentage points below expectations.

The average U.S. 30-year mortgage rate jumped to a nine-month peak on Wednesday and hit the second-highest rate since 2001, as interest rates reacted sharply to a downgrading of U.S. government debt. The average 30-year mortgage rate shot up to 7.09% for the week ending Aug. 4, a 16-basis point increase from the previous week’s 6.93% rate, according to a weekly report released by the Mortgage Bankers Association. Rates have not been that high since November 2022, which were then the highest levels since 2001. Potential borrowers adjusted promptly to the surging cost of borrowing: the mortgage applications index – a measure of total mortgage application volume – fell 3.1% to a six-month low of 194.5. Recent data has suggested that the home price cooling engineered by the Federal Reserve’s aggressive interest rate hiking campaign could be slowing down. While demand in the past year has waned, a severely limited housing stock has kept upward pressure on prices. But the recent data showing higher mortgage rates and crimped demand could be welcome news for overall shelter costs and the U.S. central bank’s effort to bring inflation down.

The dollar fell on Thursday after data showed U.S. consumer prices rose modestly last month, while initial jobless claims gained in the latest week, reinforcing expectations the Federal Reserve will pause interest rate hikes at the next policy meeting. The consumer price index (CPI) rose 0.2% last month, matching the gain in June, the Labor Department said on Thursday. The CPI climbed 3.2% in the 12 months through July, up from a 3.0% rise in June, which was the smallest year-on-year gain since March 2021. In the 12 months through July, core CPI grew 4.7% after rising 4.8% in June. Futures on the benchmark fed funds rate have priced in a pause in rate hikes at the next meeting and for the rest of the year. The next possible move by the Fed is a rate cut in May 2024, rate futures showed.

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 seek 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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