The Precious Metals Week in Review – September 22, 2017

1. The US Federal Reserve appeared to be the sole driver for market moves through much of the week, despite continued escalations in geopolitical tensions and massive damages to the battered Caribbean as Hurricane Maria powered through the region.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by a surprising 23,000 claims to a new level of 259,000 for the week ending September 16th, from the previous week’s revised level. The previous week’s level was revised lower by 2,000 claims. The four-week moving average of claims was at 268,750, an increase of 6,000 from the previous week’s revised moving average of 262,750. The plunge was surprising given the extent of the damage and power outages in both Texas and Florida from hurricanes Harvey and Irma. Many analysts assumed that unemployment numbers would be on the increase as a result of the massive displacement of people and businesses due to the storms.

3. Hurricane Maria spun up to Category 5 status in the Atlantic immediately on the heels of Irma and followed a similar path through the Caribbean. Islands that had barely survived the effects of Irma were completely devastated after Maria crossed over them. The U.S. territory of Puerto Rico was 100 percent without power and their communications infrastructure was totally destroyed. The tiny island was already essentially bankrupt even before the massive storm-wrought devastation caused by Irma and Maria, so their ability to rebuild and recover from the storms remains entirely uncertain.

4. President Trump’s speech to the United Nations general assembly this week was unprecedented. Mr. Trump referred to North Korean leader Kim Jong Un as “Rocket Man” due to his continued push to achieve fully functional nuclear missiles for North Korea. Mr. Trump also said that if the U.S. was forced to defend itself or its allies from North Korean aggression that the belligerent nation would be “totally destroyed”. The speech so offended Mr. Kim that he made an unprecedented personal statement about it. Mr. Kim called Mr. Trump a “frightened dog” and a “mentally deranged U.S. dotard”, and said he was personally insulted by the speech. Mr. Kim said North Korea would take the “highest level of hard-line countermeasure in history” against the U.S. Shortly after his statement aired, North Korea’s foreign minister, who was in New York for the U.N. assembly, said that the North might carry out the “biggest ever hydrogen bomb test in the Pacific”.  Mr. Kim said, “Trump has denied the existence of and insulted me and my country in front of the eyes of the world and made the most ferocious declaration of a war in history”.

5. The U.S. Federal Reserve announced at the conclusion of its most recent Federal Open Market Committee meeting that it would begin to shrink its $4.5 trillion balance sheet, liquidating $10 billion of securities each month. The Fed’s plan calls for letting the securities “roll off” as they mature, instead of selling them outright and they claim that the process will have little to no effect on the U.S. economy. Janet Yellen said that she expects that the Fed’s balance sheet will decline “gradually and predictably”.

6. The Central Bank of Russia had to step in to rescue another bank this week, this time the country’s 12th largest bank in terms of assets. This is the second bank rescue in less than one month and follows the largest bank rescue in Russia’s history earlier in the month. The latest bank collapse is stoking fears that a systemic banking crisis could be under way in Russia.

7. Germany is set to hold elections on Sunday and Angela Merkel will likely secure a fourth term as chancellor of Germany. Merkel’s apparent victory could be weakened by the likelihood that a nationalist, right-wing party could garner enough votes to gain some seats in parliament for the first time since World War II. The right wing has campaigned on nationalistic, anti-immigrant views and appears to be gaining startling traction among the German people.

8. Spain, fearing that an upcoming referendum planned to be held by the Catalonia region on October 1st could result in outright rebellion, has reportedly quietly chartered a cruise ferry to dock in Barcelona for the sole purpose of housing a sizeable contingent of riot police to quell the rebellious Catalans. According to Bloomberg, Spain’s highest court has declared the referendum illegal and Madrid is placing “more boots on the ground” near Barcelona for the purpose of arresting local officials and raiding regional government offices prior to the date of the referendum.

9. Standard & Poor’s downgraded China’s sovereign debt rating this week, dropping it to AA minus from an A plus for the first time since 1999. The ratings agency said that a long period of borrowing has caused China’s economic and financial risks to escalate. S&P also lowered ratings on three foreign banks that primarily operate in China sending them to A plus from AA minus, saying that DBS Bank, Hang Seng Bank and HSBC were all unlikely to avoid defaults themselves if the government fails to make payments on its sovereign debt.

10. Crude oil prices pushed to near 4-month highs in spite of a continued inventory build due to the damage to Texas refineries caused by hurricane Harvey. Nearly one quarter of the U.S.’ entire refining capacity was shut down by the storm, but analysts appear to be watching global refining capacity, not just the U.S., for indications on whether crude demand is showing signs of increasing. Oil exporters were set to meet in Vienna on Friday to discuss possible continuation of their arrangement to cap production, but the market appears to be singularly focused more on whether global demand is increasing and not whether OPEC can further limit supply.

11. The euro drifted higher against the U.S. dollar through much of the week, but surged vertically lower in late trading on Wednesday, dropping back into positive territory after the Federal Reserve concluded its meeting. The euro soon bottomed in early trading on Thursday and spent the final days of the week drifting back higher. A slight drop on Friday was enough to bring the euro back to near even against the U.S. dollar, where it will close out the week. The Japanese yen drifted lower against the U.S. dollar for much of the week, plunging lower in tandem with the euro after the Federal Reserve’s FOMC meeting. A slight bump early on Friday was not enough to push the yen back near even for the week and it will close out to the downside against the dollar.

North Korea is likely to be the single-most important news item to monitor throughout the weekend once again, after the “war of words” between President Trump and Kim Jong Un escalated to new heights following Mr. Trump’s speech at the United Nations this week. In his speech, Trump said that if the U.S. was forced to defend itself or its allies then North Korea would be “totally destroyed”. Kim Jong Un took that particular comment as a personal insult and a direct threat against North Korea. In an unprecedented personal statement, Mr. Kim said that he would “surely and definitely tame the mentally deranged U.S. dotard with fire”.  North Korea’s foreign minister, who was present in New York to attend the U.N. session, said that the hermit nation might consider detonating a hydrogen bomb of “unprecedented scale” over the Pacific Ocean.

Atmospheric tests of atomic weapons have not been carried out for decades and if North Korea follows through on the statement then it would mean a marked shift for the worse in relations between North Korea and the rest of the world. An atmospheric detonation of a nuclear device over the Pacific could threaten the U.S. and other countries in the region with radioactive fallout as it drifts along on the Pacific wind currents. Russia, China and South Korea have all urged restraint in the situation, and Japan commented that a North Korean atomic test carried out in the Pacific would be completely unacceptable to Japan.

Russia’s central bank had to step in for the second time in one month to rescue a large banking institution that it deemed to be undercapitalized. The recent failures of two of Russia’s largest banks has sparked fears that a banking crisis is already under way in Russia, one that might spiral out of control of the Russian government’s ability to manage.

In Europe, Spain is quietly preparing to suppress both the populace and governing officials of one of its wealthiest regions. Catalonia has been threatening to hold referendums on seceding from the rest of Spain for years, and has planned to follow through on the threat on October 1st, despite the fact that Madrid has declared the referendum illegal. Riot police have been stationed on a cruise ferry in Barcelona and additional police are likely to be sent in to try to control the situation, according to Reuters. Reuters quoted the interior ministry as saying that the new officers would “monitor public spaces, keep order and act in case the illegal referendum is maintained”.  On Wednesday, state police in the region carried out raids on regional government offices, printers, newspapers and delivery companies, looking for banned campaign materials. Earlier in the week, the Catalan government accused the Spanish authorities in Madrid of taking over its administration after state police raided offices and arrested officials it deemed to be involved in the attempt to secede. The Spanish finance ministry has also taken control of the regional finance department.

The U.S. Federal Reserve announced this week that it was leaving interest rates where they are for the time being, but hinted that another December rate hike was definitely still “on the table”. The Fed also said that it would begin reducing its bloated balance sheet by allowing securities to “roll off” as they matured, ostensibly to minimize the economic impact of an outright sale of the securities. The announcement, which everyone was expecting and should have already been priced into the market, sent the U.S. dollar higher and equities soaring to new heights.

Precious metals prices dipped on the Fed news and the dollar’s climb, but the move may just be another opportunity for investors to “buy on the dip” since the escalating tensions between the U.S. and North Korea, and the growing political crisis in Spain appeared to step in and shore up prices once again.

Savvy investors have continued to accumulate precious metals as geopolitical and economic turmoil has increased, hoping to keep their portfolios well-diversified to help minimize the effects of collapsing asset bubbles.

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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