The Precious Metals Week in Review – September 8, 2017

The Precious Metals Week in Review

September 8th, 2017

1. The U.S. had not even truly begun its recovery from the damage dealt out by hurricane Harvey when another massive storm brewed up and took aim upon it again. Hurricane Irma could well be one of the most devastating storms ever to hit the United States, according to weather analysts. The true economic damage to the U.S. from the impact of both of these storms will take months to determine.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment surged massively by 62,000 claims to a new level of 298,000 for the week ending September 2nd, from the previous week’s unrevised level. The four-week moving average of claims was at 250,250, an increase of 13,500 from the previous week’s unrevised moving average of 236,750. Hurricane Harvey is being directly blamed for the massive surge, and the impact of hurricane Irma as it makes its way on shore in Florida over the weekend will likely trigger yet another massive surge that would send unemployment claims back over the key 300,000 level again, likely by a large margin. It could take months for unemployment numbers to normalize again as the U.S. recovers from the double impact of these storms. Many employers may be forced to close due to overwhelming structural damage to their facilities in the wake of the storms and their displaced workers might be forced to draw on unemployment for extended periods.

3. Hurricane Harvey disrupted an entire sector of the U.S. manufacturing supply chain when it blew ashore in the Texas Gulf Coast and restoration in that sector is still under way. Petrochemical companies that supply the “feedstock” chemicals for plastics and many other industrial materials, and the railway lines that transport those stocks, were seriously affected by the storm. Analysts project that many of the factories that depend on these stocks to manufacture their products could begin running out of material as early as next week. Kathy Hall, executive editor at industry information service PetroChem Wire, said “The supply channel is paralyzed currently. Plants are coming back [online], but we’re not seeing anything moving out of the area.” Mark Eramo, vice president of global chemical business development at IHS Markit, said “If we get into the middle of September and we’re not back up and running and producing various plastics, even at some minimal sustainable rate, you’re going to start being concerned about the overall supply chain.”

4. Hurricane Irma is slated to plow its way up the Florida peninsula beginning this weekend and shipping ports in its path will likely cease operating well in advance of the storm’s arrival. The shutdown of additional shipping capacity following so closely on the heels of Harvey’s damage to Houston and its surrounding area, could deal another devastating blow to the U.S. economy. The effect could bleed into the global economy as imported goods are unable to reach their ultimate destinations in the U.S.

5. The U.S. House of Representatives backed the Senate’s version of a bill that would raise the so-called “debt ceiling” for three months and fund continued operations of the government, temporarily avoiding another government shutdown over the long-standing issue of U.S. debt. The bill also provides $15.3 billion in aid for hurricane Harvey relief and it was passed by an overwhelming majority of 316 to 90.

6. The ECB left analysts and investors alike scratching their heads after it concluded its latest policy meeting on Thursday. The central bank left interest rates steady and said that it stands ready to increase its asset purchase program known as Quantitative Easing if needed. Many had assumed that the ECB would announce that it was considering tapering off the QE program. ECB president Mario Draghi said that low inflation rates necessitated a “substantial degree” of easy monetary policy at least through the end of the year. He added that the central bank would decide at its October policy meeting on whether to continue the program into next year. Mr. Draghi told a press conference at the meeting’s conclusion that “The Governing Council confirms that the net asset purchases, at the current monthly pace of 60 billion euro, are intended to run until the end of December 2017, or beyond, if necessary. This autumn, we will decide on the calibration of our policy instruments beyond the end of the year.”

7. Russia’s Foreign Ministry classified the U.S.’ demand that it shut down and vacate its consulate offices in San Francisco and two trade offices in New York and Washington last week as “a blatantly hostile act, a grave violation by Washington of international law.” The statement on the Russian Foreign Ministry web site continued, saying “We urge the U.S., authorities to come to their senses and to immediately return the Russian diplomatic facilities. Otherwise the U.S. will bear the total blame for the ongoing degradation of the relations between our countries.”

8. Catalonia’s regional President Carles Puigdemont signed a decree calling for a
self-determination referendum of Catalonia” to be held on October 1. The referendum is in defiance of the Spanish Constitution, which gives the right to call for such a vote on seceding from Spain only to national authorities. Puigdemont’s entire cabinet also approved the decree in a likely bid to spread responsibility for the declaration over a wider group, in the event of later prosecution by way of orders from Madrid. Catalan leaders have said that if the “yes” side wins the referendum that they will declare a new republic within 48 hours of the vote.

9. North Korea continued to provoke the world this weekend when it detonated what appears to have been its 6th and most powerful nuclear test to date. The test was conducted well in advance of the upcoming September 9th celebration of the isolated country’s founding. German Chancellor Angela Merkel called for additional sanctions in a parliamentary address on Tuesday in retribution for the continued tests. In a meeting of the country’s defense ministers on Thursday, South Korean Prime Minister Lee Nak-yon said “The situation is very grave. It doesn’t seem much time is left before North Korea achieves its complete nuclear armament.” Lee reportedly also said that “Some believe North Korea may launch another intercontinental ballistic missile on the 9th, this time at an ordinary angle.” Such an event would likely infuriate the international community. In nearly all previous tests, North Korea has launched its missiles near vertical, leading them to land within several hundred miles of the initial launch site. The last test actually flew a missile over Japanese air space to land in the Pacific and caused alarm across all of Japan. If the North launches its next ICBM test at an ordinary angle, and it flies anywhere near the direction of Guam, it would clearly be trying to demonstrate to the U.S., Japan and South Korea that it has mastered the ability to use its missiles to launch precision strikes on targets of its choosing. On Tuesday, Pyongyang said it was “prepared to send more gift packages” to the U.S. if Washington D.C. continued its “provocations and futile attempts to put pressure on the DPRK.”

10. U.S. crude prices dropped as a result of reduced U.S. refining demand post-hurricane Harvey. The dip is expected to be relatively short-lived and analysts expect U.S. production and refining capacity to recover significantly in the coming month, barring further weather events. Prices did find some support after Saudi Arabia announced that it would cut crude oil allocations to its customers in October.

11. The euro had a fantastic week against the U.S. dollar, drifting steadily higher into Thursday before surging to the upside following Thursday’s ECB meeting. The momentum continued into Friday’s trading and the euro will close the week out to the upside against the U.S. dollar. The Japanese yen also had a positive week, moving vertically higher at the open, and then spending the rest of the week steadily drifting higher. The yen will also close the week higher against the U.S. dollar.

Hurricane Harvey’s impact on the U.S. was still under assessment this week as an even larger storm spun up and took aim on what may well be the entire state of Florida. These two events occurring back-to-back have called into question the ability of the U.S. economy to withstand the shock as millions of people and businesses will have been disrupted and/or displaced. Unemployment claims surged in the wake of Harvey, and with the sheer amount of people that have been mandatorily evacuated from Florida, the numbers that follow on Irma’s heels will likely add even further to economic toll.

The petroleum industry is still trying to recover from the aftermath of Harvey and many of the petrochemical feed stocks that are used in the manufacture of plastics have been destroyed or otherwise held out of the manufacturing stream by the effects of the storm. The paralysis in refining capacity and rail transportation that the Texas Gulf Coast continues to be under could have a serious drag on U.S. manufacturing as vital products required in the manufacture of goods remain out of the system. Shipping on the east coast of the U.S. will also likely grind to a halt as Irma moves ashore and crucial shipping channels and ports are closed in preparation.

The continued unpredictability of the storm’s path makes it difficult to assess exactly how shipping on the east coast of the U.S. might be impacted in the long-term as a result of the storm. In Europe, Catalonia has made news again as it makes yet another push to hold a referendum on seceding from Spain. Madrid is not likely to sit back and recognize the legality of the proposed referendum to be held on October 1st and the growing divisiveness in the region just adds further fuel to the “anti-EU” sentiment that seems to be growing more and more prevalent among the citizenry of the European Union.

In Asia, North Korea rattled world leaders once again last weekend as they set off their 6th and most powerful nuclear test to date. Many analysts and think-tanks had expected North Korea to take some sort of provocative action surrounding their upcoming “Founder’s Day” holiday, but most projections put any sort of weapons capability demonstration as occurring on the actual day of the holiday, which is this Saturday, September 9th. Many analysts now project that North Korea might go so far as to conduct another missile test this coming weekend, this time fired at an “ordinary” angle in order to demonstrate the full range of its projectiles. Such a provocative action would likely bring maximum condemnation from the United Nations and world leaders, but it is becoming clear that North Korea completely disregards any of the sanctions which have been placed upon it and will likely continue on its quest to arm itself with fully functional nuclear weapons.

The impending impact of major weather systems and North Korea’s continued provocations have masked much of the news out of Europe, specifically regarding the ongoing “Brexit” negotiations. The discussions on implementation of the United Kingdom’s exit from the European Union still appear to be far from nearing full agreement. Accusations that the EU is attempting to “blackmail” the UK into paying a sizeable exit bill are surfacing once again. The crippling of many south and east coast U.S. ports as a result of the Hurricanes Harvey and Irma could also have a detrimental effect on European economies as their exported goods and materials fail to arrive in the U.S. on schedule.

The escalating uncertainty levels, both geopolitical and economic, have sent precious metals prices moving higher as investors seek safer havens, questioning whether recent events could finally trigger the long-awaited correction in stock markets.

Savvy investors have been steadily accumulating physical precious metals as part of a well-diversified investment portfolio while prices have remained low, well in advance of any rapid surge that could come about due to “black swan” events.

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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