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Market Update: Hanging In

Written by Amelia Bourdeau
April 21, 2023
5 min read

US equity indexes were slightly down on the week: S&P 500 -0.1%, NASDAQ -0.4%, and DJIA -0.2%. Equity volatility is below bond market volatility. The VIX Index fell further to a subdued reading of 16 this week, while the BoA MOVE Index, which measures implied volatility of one month treasury options, remains elevated at 120. The KBW regional bank index gained 0.5% while the wider KBW bank index rose a modest 0.1% on the week.

Fed Pricing: Fed funds futures are pricing in an 85% chance of a 25bp rate hike at the May FOMC and about a 27% probability of another 25bp hike at the June meeting. 74bps of rate cuts are priced in from July through January 2024. This is slightly less than the 79bps of rate cuts priced last week.

Below we discuss developments in precious metals. Regarding the diamond commodity, US consumers are cautious but are "hanging in" and China demand is seeing the benefit from economic re-opening. Diamond miner Lucapa had a record volume mined in Q1, while Petra's sales fell off due to the Williamson mine's temporary closure, but both saw higher rough diamond prices in some capacity. Both gold and silver had price declines this week. The Silver Institute released its annual World Silver Survey 2023.

Precious Metals:

DIAMINDX was down 0.4% on the week to USD 5,250. Taking a look at US demand, as the US is the world's largest consumer of diamonds, real personal consumption expenditure (real PCE) on a 3 month annualized change basis turned up with a strong January read after dipping late in 2022 (chart below). The February read was fell 0.1% on the month. We get the March reading next Friday. US payroll employment has been holding in, supporting US consumption, despite high inflation. DIAMINDX experienced a surge in early 2022 (post-pandemic recovery) on the back of strong jewelry demand. Prices so far in 2023 have declined, but on a 3 month annualized change basis, have improved since late 2022 (chart below). So far, the US consumer has turned more cautious but is still hanging in.

Chart: US Real PCE vs. DIAMINDX Apr 21 - Chart 3

Turning to China demand, last week we looked at LVMH's strong Q1 sales results which were mainly attributed to a sharp China rebound. China is the world's second largest consumer of diamonds. Here, we look at Chow Tai Fook's, greater China's largest jeweler, results for Q1 2023.

Retail sales value ("RSV") rose 14.2% for the group as a whole. Mainland China's RVS was 9.6% y/y and Hong Kong & Macau was up 71.2%. Same store sales growth ("SSS") in Mainland China was down -5.6% y/y, but narrowed significantly from its previous read of -33.1% y/y. SSS for Hong Kong & Macau increased a sharp 96.5% y/y.

Chow Tai Fook's release noted "SSS" in both the Mainland and Hong Kong and Macau demonstrated a notable improvement from the last quarter." Furthermore, the results reflect China's reopening, the release noted, "general mobility and retail activity in Mainland China and Hong Kong and Macau had indicated signs of recovery, following the shift in COVID-19 policy in the Mainland." The China reopening theme should continue to act as a tailwind for the diamond industry throughout the remainder of 2023.

Chart: Chow Tai Fook - Same Store Sales Growth. Sharp rebound in HK & Macau, while Mainland China's decline narrowed significantly.

Apr 21 - Chart 4

On the diamond mining front:

Lucapa announced a record volume was mined in Q1 2023. At its Lulo mine in Angola, a combined total of 7,162 carats were sold in Q1 for USD 12.6 million - a 175% and 77% increase respectively year-on-year. Price per carat in Q1 fell 36% y/y to USD 1,759.
At the Mothae mine in Lesotho, a total of 6,315 carats of rough diamonds were sold for USD 5.6 million - a 5% decrease in revenue over the corresponding prior year period as less carats were sold. On positive note, the average diamond price per carat was up 28% year-on-year to USD 887.

Petra Diamonds Q1 sales had a sharp fall, down 52% year-on-year to USD 67.8 million, as a result of its Williamson mine in Tanzania remaining closed after the breach of a tailings dam, which offset higher rough diamond prices received during the sale.

On a brighter note, Petra CEO Richard Duffy said that improved diamond pricing was the result of the post-Covid recovery in demand from China and that "We continue to expect a supportive diamond market in the medium to longer-term as a result of the structural supply deficit..."

Gold and Silver

Gold fell 1.3% this week to come in at USD 1,978 at the time of writing. Gold rose during the banking turmoil episode in March, though it was swung around a bit by high US bond market volatility. Since, bond market volatility has peaked and gold has been more stable within a USD 1,950 - 2,050 range (see chart here). The fall in gold this week has been been driven by a slightly stronger USD as the DXY Index found a base around 101.60 level and has remained above since (more below in USD section). John Reade, Chief Strategist of the World Gold Council, notes that month to date inflows of gold into physically backed ETFs are just below 15 tonnes (see here).

Silver is down 1.5% on the week and at the time of writing has dipped below USD 25.00 to USD 24.96. This is silver's first weekly negative print in 5 weeks. Its stellar run was likely due for a pullback as investors took some profit.

The Silver Institute released its 2023 World Silver Survey. According to its research, 2022 saw silver's most significant market deficit on record, hitting 237.7 million ounces. In 2022, retail demand for silver was strong as those investors sought "to protect their wealth from an effective fiat currency devaluation." In contrast, institutional investors were "not interested" as they found yield elsewhere as the Fed aggressively hiked rates and US equities performed well. The report notes that "The downward pressure on silver prices from this [institutional activity] further boosted physical demand."

Looking ahead, The Silver Institute and Metals Focus (which prepares the report) expect silver to post another "sizable deficit." Analysts expect solid demand will create a market deficit of 142.1 million ounces in 2023. They note that industrial demand drives supply but institutional investors drive silver's price, which will likely be decided by whether the Fed keeps rates steady or cuts rates in H2 2023. The report does not assume that the Fed will cut rates in 2023. As a result, forecasts in the report see silver's price move broadly sideways over the next few months, before commencing liquidations in the second half of the year. By Q4, The Silver Institute's report expects silver's price to trade in the low USD 18s.

Chart: Silver - Global Demand Forecast

Apr 21 - Chart 2

__USD __

The USD (DXY Index) gained a modest 0.3% on the week. It found a base around 101.60 and remained above that level finishing the week at 101.74. USD was supported by a rise in the US 10 year bond yield (chart below). It is trading in a tight 102.20-101.60 range. The 100 is a major support - it is a level that the DXY has not been below for approximately one year. The US Treasury yield curve has shifted higher relative to one week ago. Slightly less Fed rate cuts are expected through January 2024 vs what was priced last Friday. Both of these factors were USD supportive.

The USD could see support throughout the year on bouts of risk aversion and the possibility that the Fed will, as it has forecasted, keep rates steady and not cut - a point brought up in the World Silver Survey 2023, which helps account for its lower year-end silver price.

Chart: USD (DXY Index) vs. US 10 year yield

Apr 21 - Chart 1

__Ahead next week, select events include: __

US Q1 2023 US GDP, the Employment Cost Index (another inflation indicator), and US personal consumption expenditure and PCE prices for March (both released on Friday).

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Disclaimer: This report has been prepared by the Strategy Team of Diamond Standard Inc. (“Diamond Standard”). This report, while in preparation, may have been discussed with or reviewed by persons outside of the Strategy Team, both within and outside Diamond Standard. While this report may discuss implications of legislative, regulatory and economic policy developments for industry sectors, it does not attempt to distinguish among the prospects or performance of, or provide analysis of, individual companies and does not recommend any individual security or an investment in any individual company and should not be relied upon in making investment decisions with respect to individual companies or securities.
Opinions and estimates offered constitute our judgement and are subject to change without notice, as are statements of financial market trends, which are based on current market conditions. Under no circumstances does the information contained within represent a recommendation to buy, hold or sell any security, and it should not be assumed that the transactions discussed were or will prove to be profitable.