Precious Metals Week in Review 30/10/2023
- Analysts were warning that the gold market was ripe for a short squeeze rally as prices fell to a seven-month low earlier in the month, and they were proven right as the latest trade data from the Commodity Futures Trading Commission (CFTC) showed significant short-covering in gold and silver. The CFTC's disaggregated Commitments of Traders report for the week ending Oct. 17 showed money managers increased their speculative gross long positions in Comex gold futures by 10,774 contracts to 104,708. At the same time, short positions fell by 31,096 contracts to 89,605. After two weeks of being net short, speculative positioning has turned sharply bullish and is net long by 15,103 contracts. During the survey period, the short covering propelled gold prices through initial resistance at $1,900 an ounce. Commodity analysts at Société Générale noted that this was the second-largest short-covering move in the gold market on record, going back to 2006.
- Bitcoin mining consumes massive amounts of energy, giving the asset a nasty reputation as a threat to the environment and an accelerator of climate change. A new United Nations report found cryptocurrency mining has extremely high costs in the form of astronomical amounts of water and land. The global water footprint from January 2020 to December 2021 was 1.65 cubic kilometres, equivalent to filling over 660,000 Olympic swimming pools, and more than the current domestic water use of 300 million people in rural Sub-Saharan Africa. The land footprint of mining in the same period was 'more than 1,870 square kilometres, 1.4 times the area of Los Angeles. And the global carbon footprint from 2020 to 2021 was equivalent to carbon emissions from 84 billion pounds of coal burned, 190 natural gas-fired power plants, or over 25 million tons of landfilled waste. Much of this cost comes down to how electricity is produced. During this 2020 to 2021 period, hydroelectric power supported 16 percent of the world's Bitcoin mining. Even though hydroelectric power is considered a renewable resource, it requires flooding large swaths of land to build reservoirs for hydroelectric dams. Beyond this land requirement, hydroelectric power production also loses lots of water through evaporation. Despite the data collected for the study, the report emphasized that the anonymous nature of Bitcoin makes it difficult to track precisely where Bitcoin is being mined and who is mining it. To help make it less of an environmental disaster, they recommend that national governments collaborate to create more transparency in cryptocurrency policies. They also recommend economic and regulatory tools like taxes and higher energy prices to limit the unchecked growth of cryptocurrency mining and force miners to shoulder some of the cost.
- Bond yields have been a key indicator for stock sentiment in recent weeks. As yields have surged to 16-year highs, the S&P 500 has slowly given back yearly gains. Truist co-chief investment officer Keith Lerner doesn't see that correlation changing anytime soon. "For equities to have a sustainable rally, interest rates likely need to stabilize," Lerner wrote in a new research note on Monday. "And while calling a top in yields, which have had so much upward momentum, has been a fool’s errand to say the least, our best estimate is that buyers for the 10-year U.S.
Treasury yield will step in more aggressively as we approach the 2006/2007 highs near 5.25%." Lerner explained that 5% is likely a psychological level for many investors that will make them consider a fixed income investment as yields hit a round number, they haven't seen in 16 years. That could take some time. The last time 10-year yields were this high 16 years ago, bond traders held out on buying until real yields — those adjusted for inflation — peaked at about 2.8%. That could be what investors are waiting for again this time, Lerner says. And he isn't alone in thinking that the key for stocks to fall will be yields settling down. "Volatility has been elevated," Charles Schwab strategist Kathy Jones said this week. "And it probably is going to continue to be because a lot of that has to do with uncertainty about the direction of [monetary] policy." But if Lerner's call for 25 more basis points to the upside in the 10-year yield is right, investors may be stuck waiting longer for the rise in yields to clear a path upward for stocks.
- Japan’s era of negative interest rates will end in coming months, and the implications for world markets will be enormous, with U.S. Treasuries set to suffer the most, according to the latest survey. The move would bring an end to a bold experiment it embarked on in 2016, one that’s recently placed Japan at odds with other major central banks that have been tightening aggressively to combat inflation. What the BOJ (Bank of Japan) does, and when it does it, will reverberate through world markets. The biggest consequence, according to respondents: more turbulence for the vast number of Treasuries. That’s because higher yields in Japan would encourage fund repatriation by Japanese investors whose huge holdings include U.S., European and Australian debt. “A shift in the BOJ’s policy could slow the export of capital from Japan as yields become more attractive locally than they were before,” said Martin Whetton, head of financial markets strategy at Westpac Banking Corp. Japanese investors are the biggest foreign holders of U.S. government bonds, with more than $1.1 trillion at the end of August, according to data from the Treasury Department. Treasuries, traditionally the pillar of stability in many saving and investment portfolios, are already more volatile than stocks, at least by one measure. The combination of the aggressive policy tightening by the Federal Reserve and the flood of bond sales by the U.S. government have imposed historical losses, especially on long-duration debt.
- The U.S. economy has avoided slipping into recession all year, but one closely watched indicator shows it's on the brink. Usually, yields on longer maturity bonds exceed those of shorter ones. An inverted yield curve happens when the reverse occurs. Some track the spread between two-year and 10-year Treasury notes for signs of an inverted yield curve. But Canadian economist Campbell Harvey's definition uses the difference between three-month bills and 10-year notes, a spread which turned negative in November 2022. It's a perfect 8-for-8 in predicting every recession since World War II. The amount of time it takes after the inversion for the economy to fall into a recession can vary. The past four recessions occurred when the spread between the two yields narrowed and came close to reverting back to normal. That is what is happening now. "I've become a bit more pessimistic since August." Harvey had previously called for the Federal Reserve to stop hiking interest rates and believes any additional hikes throughout 2023 will cause significant stress. "Monetary tightening from the Fed operates with a lag and we just don't see it right now," Harvey said.
- In the week ending October 21, the advance figure for seasonally adjusted initial claims was 210,000, an increase of 10,000 from the previous week's revised level. The previous week's level was revised up by 2,000 from 198,000 to 200,000. The 4-week moving average was 207,500, an increase of 1,250 from the previous week's revised average. The previous week's average was revised up by 500 from 205,750 to 206,250.
- Oil prices rose on Friday, regaining ground after tumbling more than $2 a barrel in the previous session as concerns of a wider Middle East conflict eased while the United States, the world's biggest oil consumer, showed signs of weakening demand. Brent crude futures climbed 45 cents, or 0.5%, to $88.38 a barrel while U.S. West Texas Intermediate was at $83.63 a barrel, up 42 cents, or 0.5%.
- EUR/USD continues to trade in its tight daily range slightly below 1.0550 on Friday. The data from the U.S. showed that the annual Core PCE (Personal Consumption Expenditure) inflation declined to 3.7% in September as expected, limiting the U.S. Dollar's gains, and helping the pair limit its losses. EUR/USD continues to trade in its tight daily range slightly below 1.0550 on Friday.
- The Japanese Yen (JPY) finally boxed its way out of its corner on Friday, strengthening against most counterparts, after the release of Tokyo inflation data spurred bets the Bank of Japan (BOJ) will raise interest rates – broadly seen as positive for the currency. The USD/JPY exchange rate, which measures the number of Yen that can be bought with a single U.S. Dollar (USD), fell back below the key 150 level after briefly flirting with a breakout higher. The level is seen by many as subject to intervention by the Japanese Ministry of Finance (MOF), after it intervened when the pair hit 151.94 last October. Whether the MOF intervened to support the Yen this time around is subject to speculation.
China is selling off massive quantities of its U.S. assets and has little choice but to reallocate the funds to gold, according to Vladimir Zernov, Market Analyst at FX Empire. Zernov noted that U.S. Treasury data indicates that China is selling U.S. assets at a rapid pace. “Some observers believe that China tries to provide support to its currency,” he wrote. “However, China may be selling U.S. assets due to geopolitical tensions.” Zernov said he believes that China does not have too many options if it wants to reallocate its reserves, and gold is one of the few viable alternatives to U.S. Treasuries. “In this scenario, China could increase its gold purchases in the upcoming months,” he wrote. According to recent data from the U.S. Treasury, Chinese investors sold $21.2 billion worth of U.S. assets in the month of August. While Fed policy outlook was the biggest driver behind the sell-off in Treasuries, it looks that China’s activity contributed to the move that pushed the yield of 30-year Treasuries towards 5.00%. Zernov said he believes that, contrary to the prevailing market view, high Treasury yields may serve as an additional bullish catalyst for gold. “Traders are searching for safe-haven assets due to geopolitical tensions,” he wrote. “Treasuries are considered to be among the safest assets in the world, but their price is falling for months, and some investors may choose to buy gold.”
A deepening crash in the bond market has sparked panic on Wall Street in recent weeks.
Treasury prices have plummeted, sending benchmark 10-year yields above 5% for the first time in 16 years. Remember, yields move in the opposite direction to bond prices, so the massive spikes of the past few weeks mean that Treasury prices are tumbling, fast. Two factors have fuelled the recent run-up in yields: the Federal Reserve, and the government's ever-growing mountain of debt. Over the past 18 months, the Fed has raised benchmark interest rates by more than 500 basis points, the steepest increase since the 1980s. In recent months, the central bank has signalled it plans to keep rates high well into 2024 in a bid to kill off inflation, which has cooled this year but is still running way clear of the central bank's 2% target. When borrowing costs go up, bond prices fall because their fixed returns become less attractive to investors. Lingering concerns about America's ballooning indebtedness have also contributed to the sell-off. The U.S. government's outstanding borrowings have tripled over the last two decades to a staggering $33.64 trillion, official data show. That dwarfs the world's largest economy's GDP of around $27 trillion. The debt has surged by $640 billion in the past five weeks alone, suggesting an accelerated supply of bonds and bills that's threatening to overwhelm demand. In other words, the slump in bond prices suggests the Treasury is selling debt faster than the market can absorb it.
High interest rates are derailing the ambitions of climate regulators and automakers to accelerate the shift to electric vehicles, underscored Wednesday by the scrapping of a GM-Honda partnership and a warning from a battery maker. “EV demand next year could be lower than expectations," Lee Chang, chief financial officer at South Korean battery maker said on Wednesday, due to global economic uncertainty. Also on Wednesday, Honda and General Motors announced they were ending a $5 billion plan to develop lower-cost EVs together just a year after announcing the effort. GM on Tuesday said it would focus near-term EV efforts on meeting demand rather than hitting specific volume targets. Tesla CEO Elon Musk raised the alarm last week in explaining why he was slowing plans for a Mexico factory. "I am worried about the high interest rate environment that we're in," he said on Tesla's earnings conference call. "As I just can't emphasize this enough that the vast majority of people buying a car is about the monthly payment. If interest rates remain high or if they go even higher, it's that much harder for people to buy the car." Lithium prices have tumbled 67% so far this year based on spot lithium carbonate prices. Prices of cobalt metal on the CME have slid 20% this year and more than halved since May last year. Shares of Japan's Nidec logged their biggest decline in a decade and a half on Tuesday, tumbling more than 10% on investor concerns over the motor manufacturer's prospects in an increasingly tough Chinese market for EVs.
Volatility should be expected to remain high as investors will be closely watching for hints on upcoming monetary policy direction. Many investors have redoubled their efforts to ensure that their portfolios are sufficiently diversified in the hopes that they will be able to withstand corrections in multiple market sectors. Many of these investors have included physical precious metals as part of their diversification plans, given their long history as a hedge against both inflation and during times of economic turmoil. Remember, the key to profitability through the ownership of physical precious metals is to own the physical product and hold it for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long run.
Here are your Short-Term Support and Resistance Levels for the upcoming week. ￼
Support 1962/1927/1903 22.57/21.79/21.22
Resistance 2016/2051/2105 23.91/24.48/25.26
Support 886/877/865 1119/1117/1114
Resistance 906/917/926 1124/1226/1228
This is not a solicitation to purchase or sell.