The Precious Metals Week in Review – October 20, 2017

1. Geopolitical issues seemed to continue to be the primary driver for market moves this week as North Korea escalated its belligerent threats to fire nuclear weapons at the United States and its territories. Europe also continued to be a geopolitical hotspot as Spain’s constitutional crisis over the Catalonia situation continues.

2. Firefighters in California say they expect full containment of the blazes that have destroyed thousands of acres and multiple structures across “Wine Country” by Friday. Another blaze that ignited on Monday, 100 miles further south was still being battled and is expected to continue to spread in the near term.

3. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by another 22,000 claims to a new level of 222,000 for the week ending October 14, from the previous week’s revised level. The previous week’s claims level was revised higher by 1,000 claims. This marks the lowest level of initial claims since March of 1973. The four-week moving average of claims was at 248,250, a decrease of 9,500 from the previous week’s revised moving average of 257,750. It is highly likely that unemployment data is heavily impacted by Hurricanes Irma and Maria in Puerto Rico and the Virgin Islands, and also in California where wildfires have caused massive damage and evacuations.

4. Late Thursday, the U.S. Senate passed a $4 trillion budget resolution by a narrow margin of 51-49, likely clearing the way for the Congress to finally move on to its tax reform proposals. The Senate will first have to reconcile the budget resolution it passed with a separate one that was passed by the House of Representatives before it can move ahead with the tax reform measures.

5. The decision on who will head the U.S. Federal Reserve after Janet Yellen’s term ends in 2018 could be solidified by November 3rd. Ms. Yellen still refuses to say whether she would accept another term as Fed Chair but President Trump has still not ruled out the possibility that he could re-appoint her.

6. North Korea continued its threats and belligerence this week as its deputy ambassador to the United Nations warned Monday that the Korean Peninsula “has reached the touch-and-go point and a nuclear war may break out any moment”.  Russia announced on Monday that it would be cutting economic, scientific and other ties in accordance with UN sanctions, and the European Union also announced new sanctions on Pyongyang as well for its continued pursuit of nuclear armaments. The deputy UN ambassador said that the North’s nuclear weapons were “a precious strategic asset that cannot be reversed or bartered for anything. Unless the hostile policy and the nuclear threat of the U.S. is thoroughly eradicated, we will never put our nuclear weapons and ballistic rockets on the negotiating table under any circumstances”.

7. Iran’s Supreme Leader Ayatollah Ali Khamenei said that it would remain compliant with the 2015 nuclear accord that it agreed to with world powers as long as the other signatories respected the agreement. He then threatened to “shred” the nuclear deal if Washington decided to exit. In a speech to students in Tehran, Khamenei was quoted as saying “I don’t want to waste my time on answering the rants and whoppers of the brute (U.S.) president. Trump’s stupidity should not distract us from America’s deceitfulness…If the U.S. tears up the deal, we will shred it”.

8. Zhou Xiaochuan, the governor of the People’s Bank of China, warned that “If there are too many pro-cyclical factors in the economy, cyclical fluctuations are magnified and there is excessive optimism during the period, accumulating contradictions that could lead to the so-called Minsky Moment”.  Zhou, speaking on the sidelines of China’s 19th Communist Party congress, said “We (the central bank) should focus on preventing a dramatic adjustment”.  Noting that China’s corporate and household debt levels are rising faster than the central bank is comfortable with. A “Minsky Moment” is when asset prices which have been soaring over a long period, fueled by debt, suddenly and dramatically collapse. The term is named after economist Hyman Minsky, who noted that bankers, traders, and other financiers periodically had the habit of setting entire economies on fire in a swath of destruction.

9. Spain’s central government in Madrid said it would suspend Catalonia’s autonomy after its regional leader failed to clarify that the region would not declare its independence from the rest of Spain. Prime Minister Mariano Rajoy said his government is ready to meet Saturday to propose measures that would strip Catalonia of some of its regional powers under Article 155 of the Spanish constitution. As was widely expected, Catalonia’s bid for independence has stirred up similar feelings in other areas of Europe. On Sunday, two of Italy’s wealthiest regions intend to hold referendums for greater independence. The regions of Lombardy and Veneto are pushing for more control over their finances and local administrations. The regions, which contain Milan and Venice, have campaigned previously for complete independence from Rome, but lawmakers in the regions have apparently agreed that Sunday’s referendum is a bid for fiscal autonomy, not secession from Italy. The referendum will not be legally binding.

10. Oil prices moved higher on reports this week that Iraq had sent troops into Kirkuk, defying a Kurdish referendum that had declared much of the northern region of Iraq to belong to the Kurds. State TV in Iraq on Monday reported that central government forces had seized control of areas in Kirkuk “without fighting”, but Kurdish controlled Rudaw TV reported that Iraqi and Kurdish forces were engaged with each other and fighting to the south and west of Kirkuk beginning on Sunday at midnight. Renewed tensions in Iraq over the disputed area could have long-term repercussions on Iraq’s oil output since Kirkuk is one of the most oil-rich areas in the country. The price hike could be temporary however, especially if the central government makes moves to increase Iraq’s oil production to try to reap immediate financial benefit while it holds the oil-rich region.

11. The euro began the week moving down against the U.S. dollar at a fairly steep angle. The euro tried to stage a recovery on Tuesday, but could not maintain momentum and was heading back to the downside by early trading on Wednesday. The euro found its floor late Wednesday and began steadily marching to the upside, crossing back into positive territory against the dollar by late Thursday. A steep plunge in early Friday trading sent the euro back into negative territory but it appears that the euro will still close out the week only slightly negative, or near even with the U.S. dollar. The Japanese yen trended lower against the dollar for nearly the entire week. There was a brief bounce higher in late trading on Thursday, but the yen could not maintain momentum and a steep plunge in early trading Friday put it back to its downward trend. The yen will close the week out slightly lower against the U.S. dollar.

Geopolitical events will likely continue to be the driver for market movements for the near-term. North Korea remains the most unpredictable of current geopolitical risks as its leader and President Trump continue to trade barbs back and forth while Russia and China try to keep the situation from escalating further. North Korea’s deputy ambassador to the United Nations said that the situation on the Korean Peninsula “has reached the touch-and-go point” and that a “nuclear war may break out any moment”.

The second geopolitical hotspot to watch will be Iraq as its central government seizes control of most of Kirkuk back from the Kurds in defiance of a referendum that they held declaring most of that region to be independent from Iraq. Any escalating conflict in that region could have a significant impact on the price of oil.

In Europe, the constitutional crisis in Spain continues as the central government in Madrid appears set to revoke much of the celebrated autonomy of Catalonia in response to their refusal to back down from their bid for independence from Spain. Prime Minister Mariano Rajoy said his government is ready to invoke Article 155 of the Spanish constitution as early as Saturday, stripping power from the regional government in Catalonia and granting it to Madrid until an official election for new Catalonian leadership can be held. In a statement on Spain’s official government web site on Thursday, Madrid said “No-one should doubt that the government will use all the tools available to restore as soon as possible the legality and the constitutional order, restore the peaceful coexistence between citizens and slow the political and judicial deterioration of which the only responsible people are leaders of the (Catalonia) Generalitat”

The contagion from Catalonia’s bid for independence appears to already be spreading to other areas in Europe. In addition to Scotland, which has previously made bids for its independence from the U.K. and plans to do so again, regions of Italy will be holding their own referendums over the weekend seeking greater independence and autonomy from Rome with regards to their finances.

In the U.K., Brexit negotiations continue to flounder. The goal at this point is to have agreement on the “exit bill” for the UK, a clear outline of citizens’ rights, and a decision on the Irish border by mid-December. If these three items cannot be agreed upon by that timeframe then the entire “Brexit” timeline will be thrown into question.

In China, the People’s Bank of China appears to be warning that debt levels for both corporations and households are expanding too quickly. The bank warned that it must take steps to prevent a “Minsky Moment” which refers to when debt fueled assets, priced at unreasonably high levels, see those prices suddenly and dramatically collapse as the bubbles burst simultaneously. Analysts have been warning that debt levels in China are unsustainable for years and to hear the central bank publicly acknowledge those warnings for what appears to be the first time could signify that the problem is already worse than analysts had previously feared. Savvy investors continue to acquire physical precious metals as part of a well-diversified portfolio even as equities continually seem to hit new record highs.

These investors recognize that as stocks keep soaring into record territory, the chances that the bubble could suddenly and dramatically burst increase substantially.

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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