The Precious Metals Week in Review – September 1, 2017

The Precious Metals Week in Review

September 1th, 2017

1. The damage from hurricane Harvey in the U.S. continues to grow and the economic impact of the storm has yet to be truly assessed. Markets will likely remain volatile as the true sense of the disaster unfolds. A delay in the automated release of the Non-Farm Payrolls Report triggered some unusual market responses on Friday.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 1,000 claims for the week ending August 26 to a new level of 236,000 from the previous week’s revised level. The previous week was revised higher by 1,000 claims. The four-week moving average of claims was at 236,750, a drop of 1,250 from the previous week’s revised moving average of 238,000.

3. Friday’s automated release of the Non-Farm Payrolls (NFP) report data was delayed by several minutes. Bloomberg said the delay was ostensibly due to “tech lockup problems” at the Labor Department, and noted that the data was still available for manual download from the Labor Department’s web site at 8:30 a.m. as usual. The delay meant that algorithmic traders did not receive their data at the usual time, and some unusual market responses seem to have occurred as a result. Most notably, gold and silver both notably surged on the slight delay in the data.

4. August’s Non-Farm Payrolls report was weaker than expected, with the U.S. economy adding just 156,000 jobs in August and the unemployment rate moving to 4.4 percent. Economists, surveyed by Reuters, were expecting payrolls to come in at 180,000 in August. Previous months’ job reports were revised downward, with June dropping from 231,000 to 210,000 and July dropping from 209,000 to 189,000, according to the Bureau of Labor Statistics (BLS). Wage growth continued to be weak with average hourly earnings moving up just 0.1 percent and the average work week declining to 34.4 hours. August is usually a slow month for payrolls, but the decimation in Houston could mean that payrolls could take another hit as unemployment surges if major businesses are forced to cease operations as they begin what could be a protracted cleanup effort to reopen their doors.

5. Hurricane Harvey blew ashore in the Houston, Texas area this week and its slow movement and devastating amounts of rainfall, the greatest ever measured in the U.S., triggered massive flooding all across the Gulf Coast Texas area. Initial estimates seem to indicate that Harvey could be the most expensive natural disaster in U.S. History, possibly costing more than Hurricanes Katrina and Sandy combined. AccuWeather estimates that the storm’s economic impact could be as much as $190 billion to the U.S. economy. Oil refineries and chemical plants across a wide area of Texas have been closed due to significant damage and/or shut down for assessment of storm-related damage.

6. North Korea ramped up its provocations this week by launching a ballistic missile which flew through Japanese airspace, passing over Japan before it broke up and landed in the Pacific. Japanese Prime Minister Shinzo Abe called the launch an “unprecedented, serious and grave threat” while South Korea called for a show of “overwhelming force” against North Korea in response to the launch. By Thursday, the U.S. had sent some of its most advanced aircraft to South Korea, including two B-1B supersonic bombers and four F-35 stealth fighters to join South Korea in live-fire exercises and bombing drills. South Korea and the U.S. are conducting annual military drills on the Korean Peninsula, and the isolated North often takes increasingly aggressive actions during the event. North Korean’s Ambassador to the United Nations, Han Tae Song, told a UN-sponsored Conference on Disarmament that the United States was responsible for driving the Korean Peninsula “towards an extreme level of explosion” due to its insistence on holding the annual drills.

7. The Central Bank of Russia (CBR) announced on Tuesday that it would step in to rescue Otkritie, the country’s seventh-largest bank by assets, as concerns grew over its loan portfolio and depositors began a run on the bank. The CBR said that it would be using its own funds in order to become a major investor in the failing bank, which is the country’s largest private lender, and that the bank’s businesses would continue to operate as usual. The bailout, when complete and if initial estimates are accurate, would be one of the largest such operations in Russia’s history. Dmitry Polevoy, chief economist at Moscow’s branch of ING bank, said “On one hand, the central bank’s comment is a relief for the market. On the other, the overall situation and the central bank’s action raises questions about the quality of the central bank’s supervision of one of Russia’s largest systemically important lenders”.

8. The U.S. ordered Russia to close its consulate offices in San Francisco and also some additional facilities in both Washington and New York that were home to trade missions this week in clear retaliation for Russia’s order for the U.S. to cut its own diplomatic staff last month. State Department spokeswoman Heather Nauert said in a statement on Thursday that the U.S. had completed its reduction of staff and that the “action was unwarranted and detrimental to the overall relationship between our countries”.  Nauert continued, saying “In the spirit of parity invoked by the Russians, the United States has required the Russian government to close its San Francisco consulate and two annexes in Washington, D.C. and New York by Sept. 2”.

9. The euro hit $1.20 against the dollar on Tuesday, sparking concerns at the European Central Bank that it may need to delay its plans to phase out its quantitative easing bond-purchasing program. The program is currently set to expire at the end of 2017, but concerns that a strengthening euro could send inflation lower and hamper economic growth by making exports costlier could mean that the ECB might need to extend the asset purchasing program into 2018.

10. The European Union’s chief negotiator for Brexit, Michel Barnier, said this week that no “decisive progress” has been made following round three of the negotiation talks between the United Kingdom and the EU. Mr. Barnier said “At the current state of progress, we’re quite far from being able to say that sufficient progress has been made”.  He also said that he and his team were willing to “step up and intensify the rhythm of negotiations” in order to get the deal worked out in time. The UK is set to leave the EU at midnight on March 29, 2019 and the exit deal must clearly be drafted well in advance of that deadline. At the moment, there are only two additional rounds of talks scheduled: one on September 28 and the other on October 9.

11. Crude oil prices dropped into the mid-upper $40-a-barrel range, even after hurricane Harvey flooded major U.S. refineries and took nearly 25% of the U.S. refining capacity offline. The U.S. government released 1 million barrels of crude from its oil reserves to a refinery in Louisiana that was still operational after the storm to help ease predicted gasoline shortages. In an odd reaction to events, demand for crude oil dropped along with the drop in refining capacity despite reported gasoline shortages ahead of the heavily-traveled Labor Day holiday weekend in the U.S. this weekend. The reasoning appears to be due to a belief that oil production will likely come back online faster than the ability to refine it, thus aggravating the ongoing global glut in crude oil.

12. The euro began the week moving higher against the U.S. dollar but had peaked by Tuesday and began a steady downward push. The euro bottomed against the U.S. dollar Thursday afternoon and began attempting a recovery. Despite pushing back into positive territory, the euro could not maintain its upward momentum and a sharp drop on Friday appears set to have the euro close the week slightly lower against the dollar. The Japanese yen tried to push higher against the U.S. dollar at the start of the week, but the attempt was short-lived and the yen began a steady decline which lasted through late Thursday afternoon. The yen saw a slight recovery through Friday, but could not bring itself back to its starting levels for the week and will close lower against the U.S. dollar.

Hurricane Harvey dominated the news this week on both the humanitarian front as well as the economic front. The storm caused devastating damage to the Texas coast, displacing over a million people from their homes, forcing businesses to close, shutting down refineries and chemical production facilities and triggering a massive spike in gasoline prices across the nation just as the heavily traveled Labor Day weekend kicks off.

The gas price hike alone was enough for some consumers in areas that are nowhere near Texas to say that they might be forced to cut back on discretionary spending items, such as eating out, in order to absorb the higher cost of gasoline. The economic impact could extend further as well, as chemical “feed stocks” for plastics and other industrial materials fail to make their way to the factories that require them in order to produce their products. These feed stocks, which are normally manufactured at plants and refineries on the Texas coast that are now closed, possibly for extended periods, are vital to multiple industries across the U.S. and Latin America.

North Korea rattled its sabers again this week by firing a ballistic missile that successfully flew over Japanese air space, for the first time ever, on Tuesday before it broke up into 3 distinct pieces and fell into the Pacific Ocean. The move triggered an immediate response from the U.S. and South Korea, who have been conducting annual joint military drills this week. The U.S. sent two supersonic bombers and some stealth fighter jets to join South Korean aircraft in live-fire exercises and bombing drills on Thursday. Russia, along with the United Arab Emirates, was quick to denounce this latest provocation by North Korea and called again for everyone in the region to tone down the provocations and rhetoric. An upcoming Independence holiday in North Korea on September 9th may see further provocation in the form of weapons tests, missile launches, or even another nuclear test as the North continues to defy all sanctions and external pressures for it to abandon its nuclear pursuits.

Russia might be less willing to side with the U.S. on getting North Korea to back down in the future, since the U.S. demanded that it shut down its consulate offices in San Francisco, along with other facilities in Washington and New York in retaliation for Moscow’s demand that the U.S. reduce its own diplomatic staff in Russia last month. Russia was given until Saturday, September 2nd to close the facilities and, in an odd and probably related twist, firefighters were called to the San Francisco consulate offices late Friday afternoon after reports surfaced that black smoke was emanating from the building. Russian officials from the consulate met the firefighters at the entrance to the building and informed them that nothing was wrong and they could depart without investigating. There is no word yet on what exactly the consulate chose to burn prior to vacating the premises tomorrow.

In Europe, negotiations between the EU and the UK appear to be moving along slower than hoped for, with the EU’s chief negotiator saying “At the current state of progress, we’re quite far from being able to say that sufficient progress has been made”.  The UK must exit the EU at midnight on March 29, 2019 and there are significant details to hammer out in how the two will deal with each other in a post-Brexit world.

The euro pushed to new recent highs against the U.S. dollar this week, putting pressure on the European Central Bank to extend its quantitative easing program beyond 2017 since a stronger euro will put downward pressure on inflation. The storm-related economic uncertainties in the U.S. could also pressure the Federal Reserve to back off on conducting its next interest rate hike as well, since data will likely be volatile while the storm’s economic impact works its way through the system over the next few months.

Precious metals prices have increased right along with growing economic and geopolitical uncertainty as investors have started to rush into “safe haven” assets to make certain that their portfolios are sufficiently diversified ahead of the long-awaited correction in stocks. These savvy investors have continued to accumulate precious metals for their portfolios as their prices have remained suppressed.

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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