The Precious Metals Week in Review – November 3, 2017

1. Speculation over the potential for another interest rate hike and who would be the pick to chair the Federal Reserve in February after Janet Yellen’s term expires directly affected market prices this week. Following the Fed’s decision to hold rates steady this week, all eyes turned to Friday’s Non-Farm Payrolls report for an indication of what the Federal Reserve might do with interest rates when it next meets in December.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 5,000 claims to a new level of 229,000 for the week ending October 28, 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 7,250 to a new level of 232,500 from the previous week’s average, which was revised higher by 250. This is the lowest level for the four-week moving average since April of 1973. Challenges due to storm damage in Puerto Rico and the U.S. Virgin Islands continue to prevent accurate unemployment data from being collected in those territories.

3. Friday’s Non-Farm Payrolls Report showed that the U.S. economy added 261,000 jobs in October. The official measure of unemployment ticked slightly lower to 4.1 percent. The number of additional jobs added, while considerably higher than September’s, were lower than economists’ expectations of 310,000. September’s figures were revised higher to show a gain of 18,000 jobs instead of the original decline of 33,000 and August’s count was also revised higher, moving to 208,000 from 169,000. Wage growth in the report was disappointing, coming in at just a 2.4 percent annualized increase. The labor force participation rate continues to run stubbornly low, with the number of people not counted in the work force increasing by 968,000 in October on top of September’s surge of nearly one million. Wells Fargo qualified October’s report as “meaningless” due to data issues from “Hurricane effects”.

4. Republicans in the U.S. Congress released their tax reform plan on Thursday after months of rumors and speculation over what changes to the tax code would be included in the plan. Now that the plan has been revealed, debate will begin as Congressional Republicans attempt to come up with the final version of the plan that can be introduced as legislation. Under current Congressional rules, Republicans could pass their tax plan without a single vote from the Democrats if they garner 100 percent support from their own members. There is a narrow margin of error, if just two Republican senators defect and vote against the plan then the final tax plan would be in danger of failing to be implemented.

5. President Trump held true to his promise, announcing Jerome “Jay” Powell as his pick for the next chair of the U.S. Federal Reserve on Thursday. Powell now must face scrutiny in the Senate before he can be confirmed to the post. If confirmed, Powell is widely expected to align with Janet Yellen’s policies, providing some continuity to monetary policy once Yellen steps down from the post in February.

6. The U.S. flew two B-1B bombers over the Korean Peninsula on Thursday, ahead of President Trump’s visit to Asia. The two bombers, based out of Guam and escorted by two South Korean F-16 fighters, ran simulated attacks on land targets, but did not conduct live-fire exercises. North Korea classified the practice run as a “surprise nuclear strike drill”. The north’s official news agency, Korean Central News Agency (KCNA) reported that “The gangster-like U.S. imperialists are ceaselessly resorting to their frantic nuclear threat and blackmail to stifle the DPRK with nukes at any cost. On Thursday they let a formation of B-1B nuclear strategic bombers stationed at the Anderson Air Force Base on Guam stealthily fly into South Korea again to stage a surprise nuclear strike drill targeting the DPRK”.  Trump’s 12-day visit to Asia begins on Sunday in Japan and will include stops in South Korea, China, Vietnam and the Philippines.

7. Japan’s Shinzo Abe was re-elected as Prime Minister on Wednesday following his party’s win in October’s elections. Abe is expected to reappoint most of his current cabinet ministers and continue his push to change Japan’s pacifist constitution. Abe continues to struggle to bring Japan’s economy to full recovery after decades of economic stagnation.

8. On Thursday, Venezuela announced that it plans to restructure its foreign debt. President Nicolas Maduro stated that a $1.1 billion payment on a bond that matured Thursday would be made, but that he was creating a commission to study “restructuring of all future payments”. The move may lead to an outright debt default by the struggling nation since the U.S. has implemented sanctions that block the purchase of any new debt issued by Venezuela and its government-owned entities. Maduro’s appointment of Vice President Tareck El Aissami as the head of the commission is also going to block any U.S. participation or cooperation with plans to restructure debt. El Aissami was specifically named and placed on sanctions lists by the U.S. Treasury Department after accusations surfaced that he is heavily involved in drug trafficking and has ties to Hezbollah.

9. In Spain, a judge issued a European arrest warrant for rogue Catalonian leader Carles Puigdemont and four members of his former cabinet. All the individuals named in the warrant are apparently in Belgium securing lawyers and failed to appear in court in Madrid on Thursday. Eight additional former Catalan ministers were remanded into custody this week while a ninth, who left his cabinet post before Catalan officially declared independence, was released on bail. Spain’s chief prosecutor has called for charges of rebellion, sedition and embezzlement to be brought against Puigdemont, members of his former cabinet and former members of the regional parliament for their roles in the wealthy region’s catastrophic bid for independence. Spain’s central government stripped Catalan’s regional government of its powers, dissolving it after their declaration of independence from Spain and Madrid has called for new elections to be held by December 21 to form a new regional government for the region.

10. The Bank of England (BoE) announced this week that it was hiking interest rates by 25 basis points, moving them to 0.5 percent. It is the first rate hike for the BoE since the financial crisis began. Seven of its members voted for the increase and the bank took a dovish tone, saying that any future rate increases would be “gradual” and to a “limited extent”.  BoE governor Mark Carney noted at a press conference following the meeting that the Bank has faced a “cloud of uncertainty” facing the pound sterling since the vote to leave the European Union took place last year.

11. Oil prices pushed to near 2-year highs on the back of rising global demand, expectations that OPEC and other oil producing countries would extend their production caps, and an increase in prices to Asian buyers by suppliers in the Middle East. Brent Crude, the global benchmark for oil prices, jumped over $60 a barrel, while the U.S. based West Texas Intermediate (WTI) prices pushed to $55 a barrel.

12. The euro drifted upward against the U.S. dollar in a series of peaks and valleys for much of the week. There was a slight reversal on Wednesday morning, but the currency had resumed its upward trend by late Wednesday night. Friday’s release of the U.S. Non-Farm Payrolls Report (NFP) saw the euro take a near vertical plunge back to where it started for the week and it appears set to close out the week near where it began. The Japanese yen began the week moving higher against the U.S. dollar, but had begun a steady downward trend by early Tuesday morning. The yen appeared to find a floor by mid-Wednesday, and began moving essentially sideways through Friday. The yen also saw a steep move to the downside after Friday’s release of the NFP data in the U.S. and will close the week lower against the U.S. dollar.

With President Trump arriving in Asia this weekend, it is likely that North Korea will put on some sort of display of military strength, possibly conducting further weapons tests, or even the test launching of another one of its ballistic missiles. Trump will be in Asia for 12 days, but apparently does not plan to make a visit to the notorious Demilitarized Zone (DMZ) on the border of North and South Korea. Security is sure to be incredibly tight throughout Mr. Trump’s visit and it is also highly likely that protests will follow him wherever he goes. There are many in Asia that blame Mr. Trump for the high level of tension in the region due to his constant use of Twitter to criticize not only North Korea itself, but also the way its neighbors have been handling North Korea’s nuclear ambitions.

Venezuela has likely sent up the first warning shot that it could default on its debt. President Nicolas Maduro announced that he would be seeking to restructure the crumbling nation’s debt, but increased sanctions by the U.S. Treasury Department will mean that U.S. entities that might currently hold some of Venezuela’s massive debt in the form of existing bonds will be unable to participate in any such restructuring. The sanctions in place in the U.S. forbid the purchase of new debt issued by Venezuela or its state-owned entities and any restructure attempt would surely involve the issuance of new bonds to replace the old. To date, Venezuela has continued to make payments on its staggering debt at the expense of imports of badly needed food and medicine for its people. Unrest continues to grow across the country and it is uncertain if any sort of debt restructuring will alleviate the situation.

The Non-Farm Payrolls Report in the U.S. came in with a sizeable increase in the number of jobs added to the economy, but it was met with a decidedly apathetic response by the mainstream media and its analysts. Economists had expected a much larger increase in the number of jobs due to effects from the multiple hurricanes that struck the U.S. and its territories in recent months. Most expected a surge in the construction industry as businesses and homeowners begin to rebuild, and that simply has not appeared. Wage growth also appears to be problematic, as hourly earnings came in at a paltry 2.4 percent on an annualized basis. The number of people not counted as part of the work force also surged again in October, increasing by 968,000 after already having recorded a sizeable jump of nearly one million individuals in September. These numbers factor in to the labor force participation rate, which has stubbornly remained at historic lows despite what appears to be an improving U.S. economy.

The Federal Reserve is now likely to follow through on its desire to raise interest rates by another quarter point when they meet again in December, in spite of the fact that inflation is nowhere near its target rate of 2 percent. President Trump announced Jay Powell as his pick to helm the Federal Reserve after current chair Janet Yellen’s term ends in February. Mr. Powell is likely to closely follow in Ms. Yellen’s footsteps, continuing with her policy of gradually raising interest as the economy appears to improve further. Inflation has remained stubbornly low despite the Fed’s best efforts to bring it to 2 percent and that has troubled its members, sparking fears of economic stagnation similar to Japan’s “lost decade”.

After suffering a massive asset bubble collapse in early 1991, Japan suffered from economic stagnation that many analysts feel lasted all the way through 2010, making it the “lost score” or “lost 20 years”. Current Japanese Prime Minister Shinzo Abe, in fact, was elected on his campaign promises to finally bring recovery back to the Japanese economy and spark growth so, in reality, it has been nearly 30 years since Japan’s economy saw significant growth.

In Europe, the constitutional crisis in Spain continues, as former Catalan leader Carles Puigdemont and four of his former cabinet members have had warrants issued for their arrest. Madrid dissolved the Catalonian parliament and fired everyone in the existing regional government after that government declared the region independent from the rest of Spain last month. The move to declare independence came following a referendum which the central government in Spain declared to be illegal. Madrid has called for regional elections to select a new government for the autonomous region by December 21, but the damage to system has already been done. It is highly unlikely that simply calling for the election of a new regional government is going to make the issue magically disappear in the minds of the people of Catalan, many of whom agreed with the break from the rest of Spain.

Brexit negotiations between the U.K. and the E.U. continue to be plagued with problems and now reports have surfaced that the Russians sought to influence the people’s vote in the U.K. Such reports have sprung up in similar fashion to the allegations that have been circulating around Russia’s alleged attempts to manipulate the U.S. election which resulted in a victory for Donald Trump. The news of possible interference in the Brexit vote is sure to serve as a distraction for the entire negotiation process.

As evidenced by the two most drastic examples, Bitcoin and U.S. stock markets, bubbles seem to be increasingly growing among multiple asset classes. As prices skyrocket, and more investors seem to join the “herd” mentality, savvy investors continue to look for opportunities to diversify their portfolios against the eventual collapse of such blatantly obvious bubbles.

These investors continue to use temporary price dips as opportunities to acquire more physical precious metals for their portfolios. These investors seek to maintain ownership of a hard asset that has historically maintained its value throughout centuries of bubble collapses and financial crises, one that does not depend on a connection to the internet in order to maintain its value.

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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