The Precious Metals Week in Review – August 11, 2017

The Precious Metals Week in Review

August 11th,2017

1. Escalating geopolitical tensions were the primary driver for market moves this week as North Korea and the United States entered into a true “war of words”, ramping up the threatening rhetoric on both sides.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment increased by 3,000 claims for the week ending August 5 to a new level of 244,000 from the previous week’s revised level. The previous week’s data was revised higher by 1,000 claims. The four-week moving average of claims was at 241,000, a drop of 1,000 from the previous week’s revised moving average.

3. Inflation data was released in the U.S. and the data showed that the Consumer Price Index (CPI) came in at just 0.1 percent, the fifth straight month that it missed economists’ expectations. The soft reading immediately lowered the odds that the Federal Reserve would be able to conduct another interest rate hike at all this year, since its target inflation rate of 2 percent seems to remain so elusive. Stocks, which had been plunging lower on escalating geopolitical tensions, moved higher after the soft data release on expectations that the Fed would be forced to prop up the market a bit longer by holding off on further rate hikes and continuing with its “cheap money” policies.

4. Geopolitical tensions were taken to a new level this week as reports surfaced that North Korea had likely gained the technology required to marry a miniaturized nuclear warhead to its missiles. President Trump met the news with his usual aplomb, declaring on Tuesday that if North Korea continued to make threats against the US that it would be “met with fire and fury like the world has never seen”. The isolated state dismissed Trump’s remarks as “nonsense” and in turn released highly detailed plans for stepping up its missile test-launches. The plans called for the North’s projectiles to fly further than previous tests, crossing over the nation of Japan and some of the world’s busiest shipping and air travel lanes to splashdown near the US territory of Guam. When questioned on the North’s new missile test plans and whether his “fire and fury” statement might have aggravated the situation, President Trump said “If anything, maybe that statement wasn’t tough enough”.

5. A Chinese state-run newspaper, the Global Times, said on Friday that “China should also make clear that if North Korea launches missiles that threaten U.S. soil first and the U.S. retaliates, China will stay neutral. If the U.S. and South Korea carry out strikes and try to overthrow the North Korean regime and change the political pattern of the Korean Peninsula, China will prevent them from doing so”. The Global Times is widely read, but is not the official mouthpiece for government policy, so the article may very well have simply been an opinion piece.

6. Russia chimed in on the escalating rhetoric on Friday, with Foreign Minister Sergei Lavrov saying at a forum for Russian students “Unfortunately, the rhetoric in Washington and Pyongyang is now starting to go over the top. We still hope and believe that common sense will prevail”.  When asked about the risks of the war of words moving into an actual armed conflict, Mr. Lavrov said “The risks are very high, especially taking into account the rhetoric. Direct threats of using force are heard…The talk (in Washington) is that there must be a preventive strike made on North Korea, while Pyongyang is threatening to carry out a missile strike on the U.S. base in Guam. These continue non-stop, and they worry us a lot”.  Mr. Lavrov later encouraged Pyongyang and Washington D.C. to sign up to a joint Russian-Chinese plan calling for a halt to joint South Korea/U.S. military drills if North Korea freezes its missile tests.

7. US/Cuba relations were also put under strain this week as reports surfaced that a group of diplomats that made recent visits to Havana appear to have suffered severe hearing loss due to some sort of sonic device that likely had been placed in, or near, their diplomatic residences. The US expelled two Cuban diplomats in response to the events, saying “We requested their departure as a reciprocal measure since some U.S. personnel’s assignments in Havana had to be curtailed due to these incidents. Under the Vienna Convention, Cuba has an obligation to take measures to protect diplomats”.  The Cuban government said on Wednesday that “Cuba has never permitted, nor will permit, that Cuban territory be used for any action against accredited diplomatic officials or their families, with no exception”.

8. The European Union appears to have been struck by two food-related issues in recent months that could soon act to send the cost of food significantly higher. The price of butter is apparently skyrocketing, making baked goods and restaurant outings more and more expensive as an apparent shortage of milk, and thus butter, sweeps through Europe, driving up the cost. The second food-related issue is a growing scandal involving insecticide-tainted eggs that have now spread to 17 countries and resulted in the destruction of millions of eggs since July 20.

9. Crude oil prices dropped on Friday after the International Energy Agency announced that OPEC’s compliance with the cuts it implemented in January had slipped significantly in July, falling to just 75%. Algeria appears to be the primary culprit for the weak compliance figure. In spite of an apparent growing demand for oil, the global supply glut continues to put downward pressure on oil prices.

10. The euro had a wild week as geopolitical tensions escalated. It began the week drifting higher against the U.S. dollar, but dropped vertically into negative territory on Tuesday after the US and North Korea began escalating tensions. The euro bounced along in negative territory, trying to stage a recovery the rest of the week. By Friday it had struggled its way back near even and a vertical surge as market close approached appears set to have the euro close the week out higher against the US dollar. The Japanese yen spent the week steadily climbing higher against the US dollar and will close the week out slightly stronger.

North Korea will likely continue to be the primary driver for all market directions for the near-term, particularly if a diplomatic solution for US/North Korea tensions is not readily forthcoming. Stocks largely ignored President Trump’s continued rhetoric on Friday, climbing their way out of a four-day losing streak, though not managing to move back into positive territory for the week.

North Korea’s unpredictability will mean that monitoring news outlets over the weekend will be vital to planning and strategy when Asian markets reopen again on Sunday at 6 PM New York Time. Should North Korea perform another missile test-launch, or take further steps to prepare for any type of action directed towards the U.S. territory of Guam, it could trigger a panic reaction in markets that could take complacent and unprepared investors by complete surprise, particularly if a sudden and rapid move into “safe haven” assets such as precious metals begins while US markets are still closed.

Mainstream media and the stock analysts that they continually parade across the airwaves continue to tout the supposed “Teflon” nature of the stock market, which seems to continually move higher despite geopolitical fears, relatively poor economic data and growing calls that a correction in stocks is long overdue. The escalating stand-off between the U.S. and North Korea largely overshadowed other news this week, but it is worth mentioning that consumer inflation data in the U.S. came in weak for the fifth straight month, sparking concerns that the economy is not nearly as robust as the Federal Reserve seems to believe. The weaker-than-expected data puts the Fed’s ability to conduct another interest rate hike in 2017 into serious doubt and has sparked discussion on whether the US economy may be nearing another recession, even as it continues to struggle out of the “Great Recession” triggered by the 2008 financial collapse.

Savvy investors have been diligently working to diversify their portfolios as stocks have continued to rise in order to ensure that their wealth is protected from over-exposure to any single asset class. Some analysts, surprisingly, have begun to reiterate that investors should “always” have a certain percentage of their portfolio in precious metals. These same analysts have been remarkably silent on that front in recent years, so for them to resume that call now clearly shows that their level of concern is rising.

Ray Dalio, of Bridgewater Associates, said in a LinkedIn post this week that he recommended investors allocate between 5 and 10 percent of their portfolios to gold on the rising risk in North Korea. Mr. Dalio closed with “We aim to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes”.  Well-prepared investors have long been making moves to increase their physical precious metals holdings in their portfolios, using any temporary price dips as an opportunity to acquire more physical product at a discount.

Remember that precious metals should always be viewed as a long-term investment and that the key to profitability through the ownership of physical precious metals is to actually acquire and own the physical products and to hold them for the long term. Always remember that you should never overextend your ability to maintain ownership of your precious metals over the long term.

Trading Department
Precious Metals International, Ltd.

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