The Precious Metals Week in Review – November 17, 2017

1. Geopolitical uncertainty continued this week as North Korea classified President Trump’s trip to Asia as proof that he is a “destroyer” and is begging for war on the Korean peninsula. Confusion reigned in Zimbabwe this week as rumors that a military coup was under way surfaced, only to be denied later by the very military officials who had clearly seized the media stations they were making the announcements from.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by another 10,000 claims to a new level of 249,000 for the week ending November 11 from the previous week’s unrevised level. The four-week moving average of claims increased by 6,500 to a new level of 237,750 from the previous week’s average. Claims submissions in the Virgin Islands continue to be severely impacted, but Puerto Rico’s processing of backlogged claims continues to improve.

3. Republicans continued to push their tax reform plan through Congress, hoping to have a finalized bill that can be on President Trump’s desk by Christmas. Key differences between the House and Senate versions of the bills still offer the potential for the process to be derailed, one of the largest being wide differences in the timeline for cutting America’s corporate tax rate. The House of Representatives passed its plan this week, and Senate Republicans hope to vote on their version after Thanksgiving. Even if the Senate approves the bill, a compromise between the House and Senate versions must be reached before the bill can be sent to Mr. Trump’s desk to become law.

4. North Korea had some choice words to say over President Trump’s recent visit to Asia this week. The isolated nation’s foreign ministry spokesman said, in a statement carried by the state-controlled KCNA, “Trump, during his visit, laid bare his true nature as destroyer of world peace and stability and begged for a nuclear war on the Korean peninsula”.  The spokesman reiterated that nothing will deter Pyongyang from pursuing its nuclear weapons capabilities.

5. As threats to the U.S. from abroad multiply and North Korea continues its quest for a reliable ballistic missile, U.S. defense contractors have begun ramping up their own missile capabilities, increasing production to fortify U.S. defense systems. The spending plan for fiscal year 2018 had a $4-billion “request” from the White House built into it for “urgent missile defeat and defense enhancements to counter the threat of North Korea.” Tom Karako, senior fellow at the Center for Strategic and International Studies who specializes in missile defense said “It’s a type of missile renaissance. Strike missile capability and missile defenses are ramping up in terms of interest, both with the United States and our partners and allies, and also among our adversaries. There’s a lot of air defenses, a lot of missile defenses out there and you see a lot of really big buys measured not in the millions but in the billions of dollars”.

6. Investors, despite markets that have continued to hover at record levels for months, appear to be running away from risk as fast as they can. According to Bank of America Merrill Lynch, funds that track junk bonds experienced outflows of $6.8 billion over the past week, through Wednesday. This is the third highest fund outflow on record. Many analysts look at the junk bond sector as a proxy for moves in the stock market and, so far, its performance this year has correlated nearly perfectly with the S&P 500 and if investors start to truly flee equities, they will likely head into “safe haven” hard assets, such as precious metals.

7. In Venezuela, analysts noted a drop in critical energy imports that has many of them worried that its state-owned oil giant, Petroleos de Venezuela (PDVSA) may be experiencing funding issues. Venezuela contains some of the world’s largest oil reserves, but most of it is “heavy” crude, that must be diluted before it can be sold on to other customers. In recent months, imports of the ingredients to dilute that oil have faltered. Matt Smith, director of commodity research at ClipperData, said “That’s a huge red flag because then they’re not importing crude to be able to blend. Once those imports dry up, it indicates that their exports are going to dry up as well, and that’s the capitulation point”.  Daniel Yergin, a noted oil analyst with IHS Markit said “Venezuela is an important producer. It seems on the verge of turmoil. If it really moved into turmoil and you lost oil from Venezuela, that would be a shock to the market”.

8. In Zimbabwe, the military seized control of the country on Wednesday and placed 93-year-old President Robert Mugabe in detention under house arrest in what it classified as a “bloodless correction”, refraining from calling it an outright coup. Mugabe has been in power for 37 years and speculation was growing that he was preparing for his wife to take over power and continue his questionable legacy. The military, it is believed, wants former Vice President Mnagagwa to take over rule after Mugabe vacates the office. Mnagagwa is much more aligned with Western interests, so if such a transition were to take place, it could actually be beneficial to the U.S.

9. In Saudi Arabia, reports surfaced that the government would allow some of royals it arrested last week to go free…if they agree to give up 70% of their wealth. Saudi Arabia’s state funds have been seriously depleted as the oil glut took hold of the globe. It appears that they have found a novel way to boost the state coffers by simply confiscating the wealth of some of its wealthiest royal family and business tycoons, nearly all of whom were arrested on charges of corruption.

10. In the U.K., German banks are preparing for what they term a “hard Brexit”, a case in which the U.K. leaves the EU without successfully negotiating access to the EU’s single market and customs union. These banks are apparently preparing contingency plans to relocate if the U.K. loses its passporting rights which would deny banks in the U.K. access into those areas if they are headquartered in London.

11. Oil prices wavered this week on growing concerns over Russia’s flagging support for extending output cuts. OPEC is slated to meet on November 30 to discuss policy, and extending the output cut agreement is likely one of the top items to be discussed. Brent crude was in the low $60-a-barrel range and U.S. light crude hovered around the mid-$50’s. A surge in weekly U.S. crude production also led to weakened price support as supply concerns continue in spite of the OPEC cuts.

12. The euro began the week drifting sideways against the U.S. dollar but began moving higher in early trading on Tuesday. The euro had peaked by Wednesday afternoon, but drifted only slightly lower and then moved mostly sideways through the rest of the week. The euro appears set to close the week higher against the U.S. dollar. The Japanese yen moved in a similar pattern to the euro, drifting sideways at the week’s start and then beginning a steady trend to the upside that lasted through the rest of the week. A surge higher on Friday ensured that the yen would also close the week higher against the U.S. dollar.

Geopolitical issues remain at the forefront for things that could affect market movements. North Korea continues to say that it will not negotiate with Washington as long as joint U.S.-South Korea military exercises continue, and that its atomic weapons programs would continue, regardless, as a deterrent against a perceived nuclear threat from the U.S. The reclusive nation is now suspected of making progress on the construction of another ballistic missile submarine. The North is known to have at least one ballistic sub, which it has previously test fired missiles from, but it was believed to be a strictly experimental prototype that was not ready for production. Recent satellite images seem to show that North Korea has another submarine under construction, and the dimensions of the apparent pressure hulls in the photos seem to suggest the finished submarine would also be capable of firing ballistic missiles.

Venezuela, who’s economy has been decimated by hyperinflation and civil unrest, appears to be nearing a crisis with its state funding. The nation has already requested restructuring of its debt, which Russia has apparently stepped in to assist with. Now, the state-owned energy giant known as PDVSA appears to be drastically slowing its import of lighter crude oils that it must use to blend with Venezuela’s heavier oils in order to create a product for sale and export to global customers. If Venezuela’s oil exports suddenly disappear, the shock to the oil market could be incredible, and the effects would likely reach into all other markets.

Political uncertainty continues in the U.S. despite the Republican controlled House of Representatives pushing its version of a tax reform successfully through this week. The Senate must still vote on their version of the bill and then the two individual versions must be reconciled with each other before any tax reform can be passed into law. The likelihood that Congress can achieve such a lofty goal by Christmas is slim.

A military coup in Zimbabwe, which the Zimbabwean military adamantly denies is a coup, could mean further unrest in that country, which is also suffering under economic stress and hyperinflation. It is believed that the military’s intent is to ensure that the former Vice President is installed into power instead of the current President’s wife. President Robert Mugabe, who is 93, has ruled Zimbabwe for 37 years and had recently begun firing perceived political rivals such as his Vice President in what is widely viewed as a reach for power by his current wife. The military claims it is merely safeguarding the government until a successful power transition can be made.

There were some minor pullbacks in stocks this week, but the real story could be seen in funds which track junk bonds. Cash outflows from such funds surged this week as investors headed for the exits. These types of funds have been closely correlated with stocks recently and some analysts are concerned that the rush to exit such funds may be signaling that the long-awaited correction in stocks could also be in the making.

As such clear uncertainty continues to reign supreme across the globe, savvy investors continue seeking ways to keep their portfolios diversified in order to try to protect their value against various forms of crises. One such way these investors diversify is to seek out buying opportunities to acquire physical precious metals when temporary price dips allow them to do so. The skyrocketing volatility in virtual currencies has made the need for securing a portfolio with physical, tangible hard assets even more important in the modern age.

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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