Summary
➡ The US government’s interest expense is expected to reach $1.6 trillion by the end of the year, becoming its largest expenditure. This could lead to interest payments on national debt consuming 40% of federal tax revenues. Meanwhile, the US dollar to yen exchange rate has been fluctuating, with the yen weakening then strengthening against the dollar. Lastly, Silver Viper, a company exploring a project in Sonora, Mexico, is in the middle of financing that will enable them to continue their project.
Transcript
Gold demand was once again driven by strong central bank buying, with the central banks adding a new record of 290 tons in the first quarter. Well, hello there, my friends. Chris Marcus here with you for Arcadia Economics on what should be a rather exciting day before it’s all said and done. Obviously, depending on when you’re watching this, we have the Fed meeting coming up shortly, or maybe it’s already occurred by the time you’re seeing this. Along with that, a new central bank gold buying record which we’ll dig into, along with a lot of other news that has come out recently. So, with that said, let’s get started.
A quick look at gold and silver prices as we’re recording: 10 o’clock on Wednesday morning here, and see gold up 12 bucks today at $2315. So, recovering a little bit after the decline of the past two days. Obviously, Tuesday saw gold down 50 dollars, so big move there. I would suggest to put things in perspective. I did tweet something yesterday about the new central bank buying gold record that we’ll get to in just a moment, and someone was saying, responded to that saying that we have a new central bank gold buying record, and yet the price is still down. I would suggest some perspective is called for, or maybe not called for, but just would be well served. Obviously going back two months, see gold at $2000, didn’t shoot up to as high as $2450, now at $2315. Yet don’t think these things are always going to be all straight up or linear, and in either case, that is where gold is today.
Silver is recovering a little bit, up 15 cents to $26.80, a similar pattern to gold as we obviously look back here at the three-month chart. So, come back in a bit recently, although something that I’m guessing most people have seen but worth just keeping an eye on is that when we look at the dollar index, which currently up to 106.22, and we see around the 12th, 13th, 14th, mid-February was when gold and silver started rallying. So in addition to rallying in the face of higher interest rates, we’ve also seen the metals rally in the face of a higher dollar, almost two points higher from when that rally began, which of course does make it interesting to imagine whenever the Fed does get to their rate cuts, if they get to their rate cuts, I suppose in some ways that’s not necessarily a done deal, given the trouble that they are having getting inflation down.
Another thing we’ll touch on before we wrap up here today, but certainly if you do get those rate cuts before the end of the year, just makes you wonder how the metals prices will respond to that. But anyway, to get to what I mentioned as our top story in today’s show, the central banks, this came out yesterday, gold demand was once again driven by strong central bank buying with the central banks adding a new record of 290 tons in the first quarter. You can take a look at the chart here, which came from metals focus and world gold council. Blue bar on the bottom is your first quarter purchases, so just slightly higher than last year. And again, continues a trend that we’ve seen develop since 2022. Interesting on this morning’s show,
Vince was talking about the correlation that had existed between the gold price and the inverse of the US yields, where basically as real yields were rising, we would see gold sell off and vice versa in the opposite direction. That’s broken down since 2022. I don’t think it’s a coincidence that that happened just after Russia’s invasion of Ukraine, the sanctions that were placed. And of course, with Andy Schekman yesterday, we really talked quite a bit about how now Russia has responded with sanctions against JP Morgan, which just makes me wonder again, if this is what we saw in the past two years based on what’s happened and never seeing sanctions escalate, threats of sanctions on China and others. Well, perhaps we will see another bar similar to that in 2024. Who knows, maybe even an acceleration, but certainly one of the factors driving the gold price, especially in the past couple of months, but over these past two years is the central bank gold buying. And now we have a new record for the first quarter. So certainly something we will keep an eye on as we go forward.
And in terms of the reasoning behind that, here was an article from the Korea Times talking about gold banking accounts shine as the precious metals soar. Growing number of bank clients are investing in gold using a deposit account that allows them to buy and sell precious metals. One banking official mentioning here, given the current circumstances such as Iran’s recent missile attacks against Israel and the potential for a retaliatory strike from Israel, there is a strong possibility gold prices could continue to experience a further increase. Obviously, you see what’s happening with the BRICS sanctions. And of course, the expectations that a Federal Reserve rate cut is still on the way, even if the timing may be delayed.
So just interesting to see that the view in the east, obviously we hear plenty about how much gold China is buying. And you see that in Korea, an increase in the amount of gold deposit accounts that allow people to buy and sell the precious metal as depositors and trust cash to banks that purchase an equivalent value of gold on their behalf. Be interesting if we ever do get that in the US where still to this point, there has not been a lot of retail buying in the rally, but again, we will see when that changes. I don’t think it will necessarily be at today’s Fed meeting, which you see is basically a hundred percent priced in that we’re going to have a pause.
If we look further out, we see now the probabilities of a cut pushed out to November, 42% chance of a cut, 41% chance of a pause, certainly a different picture than we saw coming into this year. And few things the Fed will be digesting as they make that meeting. This came out, I believe it was on Tuesday, employment cost index increased 1.2% on the quarter while labor costs increased 4.2% on the year. So again, showing that we are, again, showing that the idea that just because rates are higher, that was going to fix all the inflation problems continuing to not be the case.
At the same time, in terms of some of the economic data here, Dallas Fed manufacturing contracts for the 24th straight month. We’ve gone through some of these before on the show here. Chicago PMI, screams stagflation, fastest drop since Lehman. We also had GDP come out last week, which was a significant miss coming in at 1.6% in the first quarter below the estimate of 2.4%. And also the other keynote here, the personal consumption expenditure index rose at 3.4%. So seeing a slowing of the economy as inflation’s continuing to be somewhat persistent. Of course, one of the things that the Fed has pointed to in terms of their view of economic strength is that the labor market conditions have been reasonably good. Unemployment rate has gone up substantially over the last year.
Although interesting when you see here is the Philadelphia Fed admitting that US payrolls overstated by at least 800,000 jobs. Of course, a lot of the jobs that are being added are part-time jobs, which excuse the equation quite a bit and would indicate an economy that has begun to slow down, which as we’ve talked about plenty leaves the Fed in a position that is not so ideal and perhaps is leading to what Jim Willy suggested a couple of weeks ago when he was on the show where what the Fed might really need is- Which means they need the rate hike and the rate cut. They need a rate hike and a rate cut. And he may well be right on that. So I’m assuming we will have a pause today, but certainly something we’ve been talking about for a long time, the corner that the Fed has backed into and why there are no easy decisions at this point. Meanwhile, while this is happening, Fed says 1,804 banks and other institutions have tapped the emergency bank term funding facility that was set up last year after some of the regional banks went down. And we did have the news come out a couple of days ago that Republic First Bank being closed by Pennsylvania has elevated interest rates, have hurt the credit dependent industry.
So as we’ve been saying, this is the trade-off when you raise interest rates. Obviously you have problems with some of the banking sector, especially when they held a lot of treasuries at lower interest rates that have been losing value as interest rates have been rising. So of course, we saw the issues with New York Community Bank earlier this year before they had an investment from Steve Mnuchin’s firm. And with the continued pressure in the commercial real estate sector, certainly does not seem like we have seen the end of the banking issues. A few other notes here, hear from Michael Hartnett, U.S. interest hit $1.6 trillion by year end, making it the largest U.S. government outlay.
Obviously we crossed the $1 trillion mark earlier this year and now the expense on the debt adding to the debt in and of itself. And here, Peter Spina mentions that the interest payments on the national debt soon to eat 40% of federal tax revenues. So we’ll find out in due time how all of this unfolds in terms of the specifics, but certainly seems like we’re getting eerily close to that point where you have things start to spiral out of control. And perhaps when you know that things are getting serious is when even Janet Yellen announces that she’s concerned with where we’re going with the U.S. deficit in a comment that came out on Tuesday afternoon. And one last note here is taking a look at the U.S. dollar yen rate, which has been quite volatile recently.
There we see the one month chart where the rate spiked last week, meaning the yen was getting weaker, which led to what is largely believed to be intervention by Japanese authorities on Monday. And as we take a look back to the one week chart, you can see here on Monday, coming into Monday was that move where it is widely believed that the Bank of Japan was intervening. And the yen rallied quite a bit against the dollar getting down to 155. Although once again, as we’ve seen sinking again and now back to a level of 157 and a half as we’re recording on Wednesday, sure, Rafi will have plenty more about that on Friday. And as we wrap up, just did want to thank Silver Viper for bringing us today’s show. Obviously, Silver Viper out exploring their La Virginia project in Sonora, Mexico, has been in the middle of a financing that will likely get them out there and drilling again soon as they continue to move their project forward.
And if you have questions about Silver Viper, you can find out more at SilverViperMinerals.com. If you’re interested in finding out more about their financing, you can click the contact tab to reach them there. And with all that said, going to wrap up for today, but hope your day is going well out there. Nice to see the decline in the metals stop for at least a day. And who knows, maybe we are closer to a turnaround, but hope you’re doing well out there and we will see you again tomorrow morning.
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