In this month’s Market Minute, we look at the recent events surrounding the fall of the FTX crypto exchange, investor concerns regarding economic growth in China, Canadian and U.S. housing, and the steady price gains of gold & silver.
Crypto Crash 2022
The news that the crypto exchange FTX was filing for bankruptcy on November 5 sent Bitcoin plunging down a further 25%. This plunge is on top of the 60% decline that Bitcoin experienced
since its November 2021 peak – bringing the total drop to more than 75%. All eyes are now focused on Bitcoin at its current price of $16,000 USD with investors holding more than a
thousand Bitcoins in their accounts for the first time since 2020 having suffered unrealized losses. Blockchain technology and cryptocurrencies are sure to revolutionize the world of finance, but we surmise that only a select few of the over 5000 cryptocurrencies that were listed on coinmarketcap.com will likely survive.
Cypto regulation has severly lagged the industry and there is no specific regulator so when the exchange crashes, it has no government agency to bail them out. The implosion takes on unstoppable momentum leaving the investor defenseless and vulnerable to losing their entire investment. FTX is only the latest debacle in the crypto space. BlockFi, 3AC, Celsius, Luna, and Voyager have all been decimated with several filing for chapter 11 bankruptcy. Dogecoin’s Shibetoshi Nakamoto believes a potential crash of the crypto exchange Binance or the stablecoin-issuer Tether could severely destabilize the entire industry. He also advised people to do appropriate research and understand the digital asset’s sector specifics before entering it. The emergence of crypto exchanges was a major factor fuelling cryptocurrencies’ price growth, and if regulators come down hard on them, the price of the underlying tokens will fall further.
China & Zero Covid
Protests across China have added to investor’s concerns about economic growth, further supply chain disruption, and commodity demand. The negative year-over-year growth in retail sales is just one example of the economic slowdown. The protests, over the government’s strict zero-tolerance approach to Covid-19, is an unusual show of defiance in the country. The government has taken swift and harsh action to head off protestors.
China has one of the most sophisticated censor systems, and police often check phones for foreign social media apps, such as Instagram and Twitter, and use cameras in public places to later detain protestors. Protests on such a large scale are highly unusual in China. While demonstrations over local grievances occur periodically, the protests are the most widespread since the Tiananmen Square pro-democracy movement of 1989. If the West puts sanctions on China for its response to protestors, China will likely retaliate with sanctions against the US which could turn into a full-on trade war. On December 1, after massive protests swept across China, several cities have taken steps to ease some Covid-19 restrictions and some top officials have signaled a softer approach to virus controls which makes some believe that an end to zero-covid might be in sight.
Housing Affordability Continues to Deteriorate
Canadian housing affordability deteriorated for a seventh consecutive quarter in Q3-2022 as the rise in mortgage rates continues to outweigh the decline in house prices. In a recent report the National Bank of Canada calculated that at the median annual income of $79,382 and the
median home price of $801,423 (all types including condos) that at current
interest rates the mortgage payment would take up 67.4% of income – the most since 1981! The lack of affordability on the back of higher interest rates is keeping buyers on the sidelines. The decline in house prices has sellers also on the sidelines. After the frenzy in residential sales activity from mid-2020 to the first quarter of this year, sales activity has dropped below pre-covid levels.
House prices are also declining in the US and Bank of America CEO, Brian Moynihan, thinks there could be more tough times ahead for the housing market. Moynihan stated that there could be two more years of pain in the housing market before activity returns to normal.
Mortgage rates on a 30-year fixed mortgage skyrocketed to over 7% by the end of November, from under 3% last year. The rapid rise in interest rates have made it even more difficult for first time home buyers and younger Americans to enter the housing market. The number of first-time homebuyers fell to 26%, the lowest level since the National Realtors Association began collecting such data more than 40 years ago.
The tide has turned in favor of Gold & Silver
Gold and Silver prices have been steadily rising since the beginning of November. The gold price has climbed to over US$1800 for the first time since July. Precious metals are boosted by a slumping U.S. dollar and the decline in U.S. Treasury yields. The change in tone towards slower interest rate increases by Fed Chair Powell has also helped propel the metal’s prices higher. For the Gold Bulls a close above US$1,850 would mark a breakout through solid resistance. The Silver Bulls are looking for a close above US$24 to breakout above technical resistance.
Central banks also added to gold demand in the third quarter. Central banks accumulated approximately 400 tonnes of gold in Q3 2022 dwarfing the 186 tonnes in the second quarter and the 87 tonnes in the first quarter.
The once every four years World Cup has dominated sports fans attention over the last month. France, the 2018 winner will either pass or retain the trophy after this coming Sunday's FIFA World Cup final. The trophy is made of malachite and gold. It weighs 6.2kg, with the malachite discs at the bottom comprising about 2kg, the roughly 4.2kg of 18 karat gold would the value of gold at US$250,000 – roughly 12 times the value of the gold value of US$21,000 when the trophy was made. However, this is only the value of the gold – the trophy is have estimated to have cost US$50,000 to make and estimates put the value at US$20 million, which makes it the most valuable trophy in the world.
In the October Market Minute, I suggested to start building a position is silver when the commodity was $18.85 USD and is currently at $23.40 USD. I recommend adding to your positions. Interest rates and the U.S. dollar are rolling over and as stated above investor sentiment towards the metals has already started to improve, but there is more to come!
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