The Precious Metals Week in Review – October 27, 2017

1. In the U.S., the drivers for market activity for the coming week are expected to be the much-discussed tax bill and the continued uncertainty over who will chair the Federal Reserve when Janet Yellen’s term ends in early 2018. Europe is expected to continue to be a geopolitical hotspot as Spain’s constitutional crisis deepens amid Catalan’s declaration of its independence.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 10,000 claims to a new level of 233,000 for the week ending October 21, from the previous week’s revised level. The previous week’s claims level was revised higher by 1,000 claims. The four-week moving average of claims decreased by 9,000 to a new level of 239,500 from the previous week’s average, which was revised higher by 250. Procedures for taking unemployment claims in Puerto Rico and the U.S. Virgin Islands remain disrupted due to damage from Hurricanes Irma and Maria, so the data is, at best, incomplete. We are now moving into the time frame where seasonal volatility factors affect the unemployment data as temporary positions open among seasonal businesses, so it may be months before the weekly unemployment claims reflect the true state of employment in the U.S. once more.

3. Initial readings on the performance of the U.S. economy during the third quarter handily beat economists’ expectations. Gross Domestic Product (GDP) grew at a rate of 3 percent, following on a 3.1 percent pace achieved in the second quarter, according to data released by the Commerce Department on Friday. Data is likely to be revised heavily in the coming months due to the fact that the impact from Hurricanes Harvey and Irma could not fully be assessed by the end of the reporting period, so there could be a significant change in either direction of the pace of growth.

4. The U.S. House of Representatives narrowly adopted a budget resolution on Thursday of this week by a margin of 216 to 212. The bill could pass in the Senate without support from the Democrats if it gets just 50 votes and the success in passing the budget could now pave the way for the much-publicized bill on tax reform, a draft of which is supposed to be released by November 1. The failure of Congress to pass any legislation of significance in the year since President Trump took office is beginning to weigh heavily on the minds of Republican constituents. The in-fighting among the Republican party under Trump’s governance could cause significant losses to Republican power when Congressional elections come around again.

5. Uncertainty continues to surround precisely who will Trump will pick to chair the U.S. Federal Reserve after Janet Yellen’s term expires in February. The front-runner appears to be Jay Powell, a current Fed Governor who would likely follow closely in Yellen’s footsteps as far as decisions on the direction of U.S. monetary policy. Trump maintains that he will announce a decision on who will lead the Fed by November 3, before he leaves on his next foreign trip.

6. The U.S. moved a third aircraft carrier strike group into the Pacific for the first time in a decade in a show of force just ahead of a state visit to South Korea by President Trump. The increased military presence ahead of Trump’s visit runs a higher risk of a “misunderstanding” between American and North Korean military forces, given the North’s recent statements that it reserved the right to shoot down U.S. aircraft even if they were outside North Korea’s official air space.

7. The regional parliament of Catalonia voted on Friday to declare independence from the rest of Spain. The motion passed in the Catalan assembly by a large margin: 70 votes for, 10 against, and 2 blank ballots. Politicians from 3 other political parties abstained from voting as a form of protest, meaning that over 50 votes were not cast at all. Spanish Prime Minister Mariano Rajoy asked for calm in a tweet following the announcement, saying “I ask for calm from all Spaniards. The rule of law will restore legality in Catalonia.” The Spanish Senate then authorized Madrid the power to invoke Article 155 of the Spanish constitution, which grants the central government the power to remove the current Catalonian government, install a technocratic government of its own choosing, and call for new regional elections in Catalonia. Catalan leader Carles Puigdemont faces a massive challenge now. His calls for dialog with Madrid immediately after the referendum was held have gone completely unanswered and his requests for the European Union to step in and mediate the crisis have also been largely ignored. The European Union fully supports Madrid and will refuse to recognize an independent Catalonia.

8. On Thursday evening, Russia conducted a training exercise to test the capabilities of its land, air and submarine-based ballistic missiles, according to a statement released by the Defense Ministry. The tests were reportedly personally overseen by Vladimir Putin, and the Defense Ministry said that “The training assignments were accomplished in full and all the practice targets were successfully destroyed”.

9. The European Central Bank announced that it was leaving interest rates unchanged, but would cut the level of bond purchases it is making under its quantitative easing program to 30 billion euros ($35 billion U.S.), from current levels of 60 billion euros, beginning in January. Instead of announcing a direct unwinding of the program the ECB has chosen instead to slow, or taper, the pace of bond purchases while extending the length of time the program will be in effect for nearly another full year. The ECB did leave itself an “out” to expand the program in the future by saying that if financial conditions or the economic outlook changes, it will adapt its monetary policy to the new data.

10. Brent crude oil pushed its way above $60-a-barrel this week, its highest level since July of 2015. While Brent, which is the international benchmark for oil prices, pushed over $60, U.S. crude pushed into the mid-$50-a-barrel. The moves appear to have been primarily driven by comments from Saudi crown prince Mohammad bin Salman regarding extending the current agreement on OPEC production cuts. Tensions between Iraq’s central government and Kurdish forces also lent support to prices as supplies from the disputed Northern region of Iraq decreased amid the confusion after Baghdad seized control of much of the region.

11. The euro spent most of the week bumping along essentially sideways against the U.S. dollar. The euro began a slight rise on Thursday ahead of the conclusion of the European Central Bank’s meeting on monetary policy. After the ECB announced that it was scaling back some of its bond purchases, while leaving the overall Quantitative Easing program in place for another year, the euro took a near vertical plunge back into negative territory and continued the decline through Friday trading. The euro will close the week to the downside against the U.S. dollar. The Japanese yen had a whipsaw week against the U.S. dollar. The yen opened the week with a brief, but vertical drop lower and then spend the rest of the week experiencing spikes and plunges after Prime Minister Shinzo Abe proved victorious in weekend elections. Despite the swings, the yen appears set to close only slightly lower against the U.S. dollar for the week.

Europe will bear watching through the weekend as Spain’s constitutional crisis shifts into new territory. The Catalonia regional parliament voted to officially declare independence on Friday, triggering Madrid to immediately invoke Article 155 of the Spanish constitution. Under that Article, the Spanish central government in Madrid claims the power to strip Catalan of its autonomy, disband its regional government, and install what will be essentially a puppet technocratic government to govern the region until new general elections can be called in the future. By late Friday evening, the streets of Barcelona were packed with protesters apparently showing full support for the bid for Catalonian independence. Madrid has already faced heavy criticism for its handling of the issue after it sent police forces into the region who aggressively tried to forcibly suppress the referendum, arresting leaders and manhandling citizens that it found at polling stations. If further police oppression occurs over the weekend, it will likely trigger riots and violence across most of the region.

North Korea should bear watching as well through the weekend now that news of a third U.S. aircraft carrier strike group undertaking operations in the Pacific has surfaced. The U.S. has not sent three strike groups into operations in the Pacific in over a decade. The show of force as Secretary of State Rex Tillerson makes a visit to the Demilitarized Zone and the chairman of the Joint Chiefs of Staff is in South Korea to meet with its military leaders could trigger some sort of response from North Korea this weekend. President Trump is slated to undertake his own visit to South Korea in the coming weeks and that, combined with the increased U.S. military presence in the region, is highly likely to anger Kim Jong Un.  Anything perceived as a U.S. provocation by the rogue regime could result in a catastrophic escalation of events.

Russia chose to undertake its own show of force this week as it was reported that Vladimir Putin personally oversaw the test launch of 4 of Russia’s own ballistic missiles in a “training exercise”. Twitter displayed multiple angles of the rapid deployment and launch of one of the mobile ballistic missiles and Russia’s Defense Ministry said in a statement that “The training assignments were accomplished in full and all the practice targets were successfully destroyed”.  It was not immediately clear if Russia’s display of force was meant for the U.S., or for North Korea. Britain’s negotiations with the European Union have quietly moved to the back burner in light of the events currently taking place in Spain, but the discussions on the criteria and costs required for their successful exit from the European Union are still facing some stiff hurdles. If the talks fail to make significant progress in the coming weeks then the entire timeline of the U.K.’s exit from the EU will be called into question.

Next week is likely to be significantly newsworthy in the U.S. as well. The White House confirmed late on Friday that President Trump will make his decision on who will head the Federal Reserve, after Janet Yellen’s term expires in February, sometime next week. The Fed is reported to be holding a meeting next week, which likely will not result in a rate hike, despite the apparent improvement in economic data in the U.S. The Fed is widely expected to hold off on any further rate hikes until December.

The Bank of England also meets next week, and the U.K.’s central bank is expected to raise interest rates in the U.K., despite continued uncertainty over the effect of “Brexit”. The U.S. Congress is also expected to unveil its new legislation on tax reform, now that they have agreed on a budget proposal.

Next Friday should also see the release of the U.S. Non-Farm Payrolls Report for October. Whenever temporary price dips allow for a buying opportunity to do so, savvy investors continue to acquire additional physical precious metals for their portfolios in an effort to diversify them against the risk of overexposure to any single asset class.

Stocks continue to surge into bubble territory despite the fact that underlying economic fundamentals appear to remain softer than such record stock levels suggest they should be. U.S. real estate data remains soft; despite declining unemployment claims data, the U.S. economy does not seem to be adding a matching number of jobs; and U.S. consumer spending appears to be on the decline again, just ahead of the kickoff to the Holiday season.

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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