The Precious Metals Week in Review – August 25th, 2023

1. Despite the recent selling pressure, analysts note that the gold market is holding up remarkably well, given that bond yields have risen to a fresh 15-year high. Overnight, the yield on U.S. 10-year bonds pushed to 4.36%, its highest level since late 2007. Analysts note that the rise in bond yields is negative for gold as it increases the precious metal’s opportunity costs as a non-yielding asset. Despite the bond yields, gold prices have managed to hold critical support. Some analysts have said that gold could benefit significantly if those rising bond yields show a crisis of confidence in U.S. debt. However, many analysts have noted that the weakness in U.S. bonds appears orderly and a natural reaction as the Federal Reserve is expected to maintain its aggressive interest rate hikes. Other analysts note that gold could continue to receive help from the growing market belief that the Federal Reserve is done raising interest rates. According to the CME FedWatch Tool, markets see an 85% chance that the central bank will keep rates unchanged next month. Markets see a roughly 50/50 chance of one more rate hike before the end of the year. Some analysts have said that although yields can move higher in the near term, an end to the central bank’s tightening cycle should eventually cap them. “While gold is holding solid support, what will really move prices is when the Fed stops tightening before they get inflation under control,” said Adrian Day, President of Adrian Day Asset Management. “Because of its debt and the threat of a recession, the U.S. could be on the cusp of a bond market crisis, but that won’t happen overnight just yet.” Despite these major headwinds, not least surging real yields, gold is showing signs of stabilizing with the recent bid being supported by a softer dollar and rising silver prices amid higher industrial metal prices on continued speculation China will have to do more stimulus.

2. The majority of Americans say federal incentives are not convincing them to buy an electric vehicle – and some claim it has even put them off entirely. Joe Biden has ambitions to make two-thirds of new vehicle sales electric by 2032. He also plans to build a network of 500,000 chargers across the country. However, a survey has found that this dream is falling flat. Despite the government offering $7,500 tax credits to motorists who invest in certain EV models, only 29 percent of people said such incentives had any impact on whether they would buy one. Some 43 percent said it has not changed their decision at all, and a further 15 percent said it made them less likely to consider the purchase. Electric cars are much more expensive to buy than their gas counterparts, despite the government touting their cheaper electric fuel. It can take up to a decade to break even on an EV compared to driving a gas-powered car. Figures from Edmunds show the average cost of a new gas car in May this year was $47,892, while the typical electric car would set you back $65,381. This comes as electric vehicle sales growth has begun to slow in the U.S., suggesting that high upfront costs are deterring consumers. Alongside concerns about cost, Americans are also worried about running out of charge and access to charging stations. Experts warned that switching to an electric vehicle is out of reach for many Americans as over a third of U.S. counties do not have a public charging port. Those living in low-income areas are facing exclusion from the charging networks. Analysis revealed more than 70 percent of America’s public charge ports are in the wealthiest counties.

3. Americans are increasingly taking advantage of their greatest source of wealth as a lifeline in times of need. by borrowing against the value of their properties, which have skyrocketed since the pandemic. According to analytics, U.S. ‘tappable equity’ – the amount available to lend or borrow against while keeping a 20 percent equity cushion has risen 56 percent over a three-year period to $9.3 trillion. A HELOC (home equity line of credit) offers an amount of funds, similar to a credit card limit, which uses your home as collateral. Unlike a home equity loan, a HELOC has a variable interest rate. In recent months, mortgage rates have soared, and Americans are now facing the highest rates since 2002. Data from government-backed lender Freddie Mac showed that a 30-year fixed-rate mortgage is now hovering at 7.09 percent. Lenders scarred by the financial crisis have typically been strict with regard to HELOCs – which are considered relatively risky for banks because the credit line is paid off after primary mortgage obligations. But rocketing mortgage rates mean cash-out refinancing has become unattractive to most homeowners. This makes financial institutions more open to HELOCS. In 2022, 1.41 million HELOCS were approved, up 34 percent from the year before. According to TransUnion, it was the highest total since 2008. While it is a way for people who have seen the value of their homes increase to get access to cash, variable rates determined by broader lending conditions mean HELOCs are affected by the Federal Reserve’s aggressive inflation-fighting interest rate hikes.

4. Sales of previously owned homes dropped 2.2% in July from June to a seasonally adjusted, annualized rate of 4.07 million units, according to the National Association of Realtors. Sales were 16.6% lower compared with July of last year. Homes sold at the slowest July pace since 2010. This count is for closings, so contracts were likely signed in May and June when mortgage rates went from around 6.5% to well over 7%. Sales fell month to month in all regions except the West, where they rose 2.7%. Sales dropped the most in the Northeast, down 5.9%. The National Association of Realtors is blaming higher rates and still tight supply for the decrease. There were 1.11 million homes for sale at the end of July, 14.6% fewer than July 2022 and the lowest level since 1999. There are now half as many homes for sale as there were pre-Covid. At the current sales pace, that represents a 3.3-month supply. A six-month supply is considered balanced between buyer and seller.

5. The BRICS summit taking place in Johannesburg this week is not likely to have any “earth-shattering” announcements, but what will matter are the new plans for the next three years. “What is happening with BRICS nations is going to rival the industrial revolution because I don’t think people understand how many countries are moving away from working with the United States or using its dollar,” Peter Grandich said. The consequences of it all will be the U.S. eventually losing the dollar’s status as the world’s reserve currency, which will trigger a much bigger debt crisis domestically. “The dollar as a world reserve currency has been one of the reasons we’ve been getting away with the type of debt crisis that we’ve allowed to happen,” he said. Investors must also keep a close eye on China this fall since developments in that region could define the macro environment for the next year. China has been seeing a significant slowdown and using its monetary policy tools to increase stimulus. This week, the People’s Bank of China lowered the rate on its one-year loans by 15 basis points to 2.5% and cut its short-term policy rate by ten basis points. This was in response to slowing economic indicators, including industrial production, retail sales, fixed-asset investment, and property investment. A major economic slowdown in China could have severe geopolitical consequences, Grandich warned. “When people start to suffer, governments like to take their minds off it. And one of the ways governments take minds off it is by getting themselves involved in wars,” he said. “This could expedite whatever their long-term plans were regarding Taiwan. And that would be another geopolitical firestorm I don’t think the United States is even close to handling. What happens in China in the next “30, 60, maybe 90 days” will be critical and could have dramatic impacts on all of us for 2024 and beyond,” Grandich added.

6. In the week ending August 19, the advance figure for seasonally adjusted initial claims was 230,000, a decrease of 10,000 from the previous week’s revised level. The previous week’s level was revised up by 1,000 from 239,000 to 240,000. The 4-week moving average was 236,750, an increase of 2,250 from the previous week’s revised average. The previous week’s average was revised up by 250 from 234,250 to 234,500.

7. Crude oil prices started trade today with a gain but were set for another weekly decline as the U.S. dollar rose further and supply concerns eased. Brent crude was trading at over $83.88 per barrel at the time of writing and West Texas Intermediate was changing hands at close to $79.60 per barrel, but both are seen booking a loss of 1.5% to 2.5% for the whole week.

8. After rising quickly toward 1.0850, EUR/USD reversed its direction and dropped below 1.0800 in the American session. FOMC Chairman Jerome Powell left the door open for one more rate hike in his Jackson Hole speech, allowing the U.S. Dollar to gather strength against its rivals. In the near term, it is expected for the current general USD appreciation to continue, as the U.S. economy remains on a better footing. Furthermore, there are risks to the ongoing disinflation and soft-landing narrative. Any deviation from that narrative could cause risk-off events, likely benefiting the USD in most cases, e.g., if U.S. inflation surprises to the topside during Q3.

9. USD/JPY has likely peaked for now, but Credit Suisse’s broader outlook still is positive. USD/JPY has retested and again been capped at the 78.6% retracement of the 2022/2023 fall at 146.66 and top of the trend channel, now seen higher at 147.10, and we look for a deeper setback from here. Support is seen at 143.89 initially ahead of the 38.2% retracement of the rally from July and price support at 143.30/00. Below 141.43 though remains needed to warn of more sustained phase of weakness in the broader range.

While housing affordability has eased some, it still is a big sticking point for homebuyers, according to analysts. Data gathered by firms shows that the median monthly payment for a home is up more than $240 over the past 12 months, a 13% increase. That marks the slowest pace of affordability deterioration since December 2021 and is more in line with earlier periods. “Any relief that lower mortgage rates were providing to affordability has largely been unwound,” James Egan, a strategist at Morgan Stanley, wrote in a note to clients. “In our view, the continued pressure on affordability prevents a significant increase in existing home sales volumes while keeping inventory tight, thus providing room for continued year-over-year growth in new home sales.” Affordability conditions also have been largely unchanged over the past six months. Still, the recent run-up in mortgage rates in the last month has reversed those fortunes. Higher costs of borrowing have weighed on inventory. Sales of existing homes are down 23% compared to the first half of 2022. Homeowners are reluctant to sell their homes when financed at a lower rate, pushing supply down and straining affordability. The lock-in effect continues to keep existing inventory near multi-decade lows, which in turn provides support to home prices.

Earning a good salary is one thing, feeling ‘rich’ is another. Even doctors, lawyers, and other highly paid professionals, also referred to as the “regular rich” who benefit from stable jobs, homeownership, and a well-padded retirement savings account said they don’t feel well off at all. Some even said they feel poor, according to a recent survey conducted. Of those making more than $175,000 a year, or roughly the top 10% of tax filers, one-quarter said they were either “very poor,” “poor” or “getting by but things are tight.” Even a share of those making more than $500,000 and $1,000,000 said the same. Despite their high net worth, less than half of all millionaires, or 44%, felt “very comfortable,” a separate report found. In fact, only 12% of Americans, and just 29% of millionaires, consider themselves wealthy, the report said.

Stronger-than-expected economic data has forced some on Wall Street to push back, or even remove calls for a recession once widely considered a sure thing. But one recession indicator is still flashing a code red signal on the U.S. economy: the Treasury yield curve. The inverted yield curve indicator, which occurs when the yield on three-month Treasury bills exceeds the yield on 10-year notes, is a perfect 8-for-8 in preceding every recession since World War II. Ahead of the last eight U.S. recessions, the average time between an inversion of the yield curve and the start of a recession has been 11 months. Over the past four recessions, the average lead time has been longer at 13 months. This time a recession is likely to start in early 2024. While a historically low unemployment rate might be something raised in an argument for why the economy remains resilient, that’s a lagging indicator. The yield-curve indicator should be seen as a warning sign for things yet to come.

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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