Precious metals news

Lenders still tapping hundreds of billions of dollars of funding that shored industry up during recent crisis. US banks remain heavily dependent on government funding, even after Silicon Valley Bank's collapse and subsequent positive market indicators. Despite improved share prices and Q2 earnings, banks' loans from the Federal Home Loan Banks stood at $880bn by June, down from $1tn in Q1 but up 150% from 2021. Critics caution this reliance promotes excessive risk, citing failures like SVB and Signature Bank.

China increased its gold reserves for the ninth consecutive month in July, adding 23 tons. The total now stands at 2,137 tons. This consistent buying by China's central bank supports gold prices, countering the usual dip caused by global rising interest rates. The World Gold Council foresees central banks continuing to boost their gold reserves, further bolstering gold's outlook.

China faces a mounting municipal debt crisis, with local governments deep in debt following excessive infrastructure spending. Local government debt reached $12.8 trillion (76% of GDP) in 2022, up from 62.2% in 2019. To tackle the crisis, Beijing considers measures like bond issuance, loan rollovers, and possibly using central funds. But aiding local bodies might encourage more reckless investments. Comprehensive economic reforms are needed to address the core issue.

The Federal Reserve advertises itself as "independent" and above the political fray.
We all know this isn't true.
The Fed is inherently political and makes decisions based on political calculations as much as economic data.

Last week, Fitch Ratings downgraded the US’s long-term credit rating from AAA to AA+. While the downgrade won't significantly impact the US government's ability to borrow, it should serve as a wake-up call because there is a much bigger problem looming on the horizon: a market-driven downgrade of the US dollar.

The global push for currency diversification has gained momentum since 2008, peaking in 2022. The upcoming BRICS Summit will address the heavy world reliance on the US dollar for trade and central bank reserves, seeking alternatives. While the US promotes the dollar's primacy, history indicates no currency remains dominant forever. BRICS nations aim for financial system diversification, not dollar elimination. As part of this move, some countries, particularly those sanctioned by the US, have reduced their dollar reserves, often opting for gold. The goal is a balanced global monetary system.

Gold prices are rising, and central banks worldwide are buying in record numbers. The World Gold Council reports 387 tons purchased in the first half of the year. This surge is driven by global "de-dollarization" strategies, especially in the face of U.S. Federal Reserve's interest rate hikes. China and emerging markets, in particular, are increasing their gold reserves to stabilize their economies and reduce reliance on the U.S. dollar. The trend also supports the internationalization of the Chinese yuan.

Global bank shares plummeted after Moody's downgraded 10 mid-sized U.S. banks due to concerns about the sector's stability, including rising funding costs and a potential decrease in deposits. This comes after the failure of three U.S. lenders earlier this year. Furthermore, Italy's unexpected decision to impose a 40% tax on banks' profits from higher interest rates caused significant drops in European bank stocks. Major banks in both the U.S. and Europe saw shares fall, reflecting broader investor apprehension.

Powerful forces are setting up for much higher silver prices, while the Major Market participants are totally unaware.  Critical changes are taking place in the silver market, especially in the world's largest silver producer, which I discuss in my newest "Weekend Update"....

Don't be misled by current silver price trends; a significant upswing is on the horizon in a monthly chart. With the Federal Reserve's limits on monetary tightening and persistent double-digit deficits, it's inevitable that inflation will surpass usual levels. This economic climate is likely to favor tangible assets and high-quality resource businesses. Given that the gold-to-silver ratio is at a historical high of 82, it underscores silver as an incredibly appealing segment of the commodities market.

Since last fall, gold prices have shown a significant rebound. Commerzbank's economists have shared their predictions on the trajectory of this precious metal. In the near term, gold prices are expected to hover around $1,950, due to ongoing uncertainty about the direction of U.S. monetary policy. While declining U.S. inflation could bring an end to interest rate increases, the persistent strength of the U.S. economy suggests a rapid shift in interest rates is unlikely. However, the outlook for the medium term suggests an uptick in gold prices. Given the anticipation of a U.S. economic downturn, speculation about potential interest rate reductions should support a rise in gold prices.

The U.S. fiscal health is worsening with a Federal Deficit run rate of $2.25 trillion. High interest costs, driven by rate hikes, contribute significantly to this deficit. The short-term bond market, a primary source for government debt, is under pressure with $9 trillion of notes maturing in 2023 and 2024. The persistent rise in Federal Deficit and declining foreign investment in U.S. bonds accentuate the issue. The central concern is escalating debt.

The "excess savings" accumulated by American consumers during the COVID pandemic are rapidly depleting. These funds, a result of substantial government support, peaked at $2.1 trillion in August 2021, but have dwindled to around $500 billion by spring 2023. This trend could hinder the U.S. economy's potential for a soft landing amidst the ongoing fight against inflation by the Federal Reserve. The rapid drawdown indicates a more substantial role of these dollars in boosting demand in the U.S. economy over the past year compared to other advanced economies.

In this week’s Nuggets, we bring you key updates on the U.S. national debt, government spending, potential threats to the dollar, and more.

The stock market's disconnect from the economy is a worrying trend. Despite a near-depressionary economy, equities saw a surge due to monetary and fiscal interventions. This created an illusion of economic growth, buoyed by investors willing to overlook economic realities. However, this 'bull market' cannot last indefinitely as the mean-reverting nature of profit margins and economic health asserts itself. The stock market has overreached, detached from the fundamentals of corporate profitability and economic strength. When the mean-reversion process inevitably occurs, the fall will be sharp and painful, revealing the true state of the economy and likely leading to disappointing returns for investors.

Apple Inc. has reported its third consecutive quarter of falling sales, predicting similar outcomes for the current period due to a widespread slump affecting demand for phones, computers, and tablets. This could lead to the longest streak of declines in twenty years for the world's most valuable company. Apple shares dipped, risking the loss of its historic $3 trillion valuation. The challenging environment is due to rising interest rates and inflation

The U.S., the globe's most advantaged nation, consistently escapes repercussions for incompetence or misdeeds. This impunity allows politicians to recklessly toy with national finances, amassing dangerous debt. Financial markets, shielded by the dollar's status as a global reserve currency, facilitate this behavior. This privilege, alongside the Fed's unprecedented power, permits deplorable mismanagement by U.S. fiscal authorities, unthinkable in the corporate world. They frequently risk default by resisting additional borrowing, a dereliction underlined by Fitch.

The US government is set to borrow $1.007 trillion in Q3, a considerable rise from the previous estimate of $733 billion, due to increasing fiscal deficit and dwindling cash reserves. The federal deficit has surged by 170% to $1.39 trillion in the nine months through June. Spending outstripped income, with $4.80 trillion spent against $3.413 trillion in generated revenues. The US pays 2.76% interest on its debt, the highest in over 11 years. Despite these, Fitch retains the US's AAA rating, but places it on negative watch due to fiscal and debt trajectories.

Under the Federal Reserve's watch since 1913, US inflation has skyrocketed to an extraordinary 3,000% as of June 2023. This is a stark contrast to the era before the Federal Reserve, when the dollar's purchasing power was tied to the supply and demand of gold, resulting in a notably stable purchasing power for over 130 years. Regardless of the measures used, the rise in the US price level under the Fed's management has been substantial and unparalleled, signifying a departure from the gold standard stability of the past.

The ECB, led by Christine Lagarde, is currently struggling with a credibility issue. While Fed Chair Jerome Powell needed almost a year to convince markets of his seriousness about rate hikes. Lagarde has tried to impose her intentions onto the market, resulting in policy inconsistencies. The ECB's Transmission Protection Instrument (TPI), designed to manage German/Italian credit spreads, has not been enough to stabilize the situation. In short, both the US and ECB are dealing with economic uncertainties due to their conflicting monetary policies.