The Precious Metals Week in Review – December 8, 2017

1. The bubbles in equities and cryptocurrencies, especially Bitcoin, floated dramatically higher this week. The comparisons between the current market behavior and the tech bubble in the 1990’s, just before it dramatically burst, grew much more pronounced this week. All eyes were on the monthly Non-Farm Payrolls report for indications on the Federal Reserve’s next move on interest rates.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 2,000 claims to a new level of 236,000 for the week ending December 2 from the previous week’s unrevised level. The four-week moving average of claims decreased by 750 to a new level of 241,500 from the previous week’s average. Claims submissions in the Virgin Islands continue to be severely impacted, Puerto Rico’s processing has apparently still not returned to normal, but continues to improve.

3. Friday’s Non-Farm Payrolls report (NFP) for November blew through economists’ expectations with the U.S. economy adding 228,000 jobs and the unemployment rate holding steady at 4.1 percent. Wage growth was muted once again, with average hourly earnings up only 2.5 percent on an annualized basis. A more thorough measure of joblessness that includes those workers that are discouraged and those holding part-time positions for economic reasons drifted higher to 8 percent, and the count of those not participating in the labor force moved higher by another 35,000 to 95.4 million. The report served to reinforce the view that the Federal Reserve will go ahead with another December interest rate hike when it meets next week.

4. The U.S. state of California caught fire again this week as the Santa Ana winds acted to accelerate 6 wildfires that continue to blaze their way across Southern California, mostly out of control. The fires in Northern California alone caused over $9 billion in insured losses earlier this year, according to the California Department of Insurance. The damage caused by the current infernos that are still raging across the south cannot even begin to be assessed until firefighters manage to bring them anywhere close to containment. The current blazes have destroyed at least 500 structures, threaten 23,000 homes and have forced the evacuation of 190,000 people as of late Thursday.

5. Tensions flared between Australia and China this week as Australian Prime Minister Malcolm Turnbull cited “disturbing reports about Chinese influence” when he announced proposals to limit foreign influence in domestic politics. Turnbull said “Foreign powers are making unprecedented and increasingly sophisticated attempts to influence the political process.” The Chinese embassy released its own statement saying “China has no intention to interfere in Australia’s internal affairs or exert influence on its political process through political donations” and went on to suggest that Australia reevaluate its relationship with China in “an objective, fair and rational manner” and to avoid making “irresponsible remarks to the detriment of political mutual trust” between China and Australia.

6. North Korea’s foreign ministry said this week that large scale military drills currently being carried out by the U.S. and South Korea, along with “confrontational warmongering” remarks by U.S. officials have pushed the Korean Peninsula to the brink of war. A foreign ministry spokesman said in a statement carried by North Korea’s official news agency, KCNA, that “The remaining question now is: when will the war break out? We do not wish for a war but we shall not hide from it.” U.S. Republican Senator Lindsey Graham reportedly urged the Pentagon to begin moving U.S. military dependents, such as spouses and children, out of South Korea, citing the growing potential for conflict.

7. The U.S. Congress narrowly avoided another ill-timed government shutdown this week by passing a short-term spending bill that allows the U.S. government to remain operational through December 22. With so much attention focused on the tax reform bills making their way through the Senate and the House of Representatives, the fact that the current “continuing resolution” to fund the government was set to expire this week seemed to go largely unreported. The new two-week stopgap measure allows congressional leaders time to work on a longer-term spending bill called a “Continuing Resolution” that has been the debt-fueled tool of choice for keeping the U.S. government operational since the Obama administration first used it.

8. The bubble in Bitcoin blew up to ridiculous levels this week as the cryptocurrency passed the $19,000 mark. At one point, Bitcoin was gaining roughly $1,000 in value every hour. The cryptocurrency is set to begin Futures trading on Sunday and it appeared that investors were surging into the cryptocurrency in a gamble to make a “quick buck” before that event. On Friday, Bitcoin was back below $16,000 as media personalities and larger brokerage firms were sounding the alarms. Interactive Brokers’ (IB) founder Thomas Peterffy said on Thursday as he was discussing the upcoming futures trading of Bitcoin with CNBC’s “Fast Money” that “smaller brokerage firms will go bankrupt” and that such an event could “destabilize the clearing houses.” IB will allow traders limited access to the Bitcoin futures market, requiring a 50 percent margin and absolutely no ability to hold short positions. Peterffy commented on the sudden surge of investors rushing into the digital currency, saying “I’m extremely curious, this is an amazing thing. How silly people are, it is just amazing” and noted that he does not own any Bitcoin himself. The Futures Industry Association sent a letter to the Commodity Futures Trading Commission on Wednesday warning of the risks that clearing firms will be taking on once futures trading begins in the volatile digital currency arena. On Friday, CNBC’s Jim Cramer said “short selling is just going to annihilate people when you can start trading it. Once this thing starts trading the futures, they are just going to kibosh it. You’re going to see a lot of shenanigans.”

9. In Europe, Brexit talks finally reached a breakthrough moment between the United Kingdom and the European Union. Negotiators claimed on Friday that they had reached a crucial breakthrough, particularly on citizen’s rights, the Irish border and the “divorce bill” for the U.K., after 6 months of intense negotiations. This does not conclude the negotiation process, but it does allow the negotiators involved to move on to discussions of trade agreements and a “transition period” for unforeseen events that might crop up after the UK officially departs the EU. European Commission President Jean-Claude Juncker told reporters in Brussels on Friday morning that “we have now made the breakthrough we needed” and UK Prime Minister Theresa May added “we worked extremely hard this week” and noted that there had been “give and take” from both sides.

10. Germany’s political situation remains uncertain and unstable as talks between Chancellor Angela Merkel’s Christian Democratic party and the Greens collapsed this week. The focus on trying to form a coalition government now hinges on the Social Democratic Party, but they have long insisted that they wish to remain in opposition to Ms. Merkel’s party so the uncertainty could continue as Ms. Merkel ponders leading a minority government in Germany as it enters the New Year.

11. Oil prices continued to hover near $60-a-barrel this week on an apparent increase in Chinese imports of crude. Prices are still constrained by over-supply as U.S. oil production has reached its highest output levels since the 1970s. One factor adding support for prices is an apparent threat of a union strike in Nigeria, Africa’s largest oil exporter, later this month.

12. The euro began the trading week with a short, but vertical, drop to the downside against the U.S. dollar. The euro spent the rest of the week trending steadily lower until Friday, when it saw a slight uptick after the release of the Non-Farm Payrolls (NFP) report in the U.S. and the “breakthrough” in Brexit negotiations was announced. The move on Friday was not nearly enough to send the euro back into positive territory for the week and it will close out lower against the U.S. dollar. The Japanese yen also started the week with a near vertical drop against the U.S. dollar, but it quickly halted its decline and began moving back near even. By Wednesday the yen had reached its highs for the week and then began a steady downward move that lasted through Friday. There was a slight bump higher after the release of the NFP in the U.S. but the climb was short-lived and the yen soon reversed course and moved to its lows for the week. The yen will close out the week lower against the U.S. dollar.

Geopolitical issues and the escalating bubbles in equities and cryptocurrencies remain the primary concerns to monitor for market impacts.

President Trump’s announcement on Wednesday that the United States would recognize Jerusalem as Israel’s capital and move the American embassy there from Tel Aviv sparked protests across the world, particularly in the Middle East. The move also prompted the State Department to issue a “worldwide caution”, saying “U.S. government facilities worldwide remain in a heightened state of alert. These facilities may temporarily close or periodically suspend public services to assess their security posture. In those instances, U.S. embassies and consulates will make every effort to provide emergency services to U.S. citizens.” The warning also urged American citizens abroad to be aware of local developments and remain in contact with U.S. embassies or consulates.

North Korea also continues to stoke tensions in the Asian region with its continued pursuit of nuclear capable ballistic missiles. White House national security adviser H.R. McMaster noted that the possibility of war with North Korea was “increasing every day” after the North’s latest missile test last week. Ongoing large-scale joint military exercises between the U.S. and South Korea have heightened tensions even further. A spokesman for the North’s foreign ministry said “Recently, as the U.S. is conducting the largest-ever joint aerial drill on the Korean Peninsula targeting the Democratic People’s Republic of Korea, its high-level politicians are showing alarming signs by making bellicose remarks one after another. These confrontational war-mongering remarks cannot be interpreted in any other way but as a warning to us to be prepared for a war on the Korean Peninsula.”

In Europe, Germany remains at a political impasse, with Angela Merkel’s Christian Democratic party unable to form a governing coalition with any of Germany’s other political parties. Germany’s political stalemate, combined with U.K. Prime Minister Theresa May’s own weakened state after her ill-fated decision to hold snap elections to try to secure a larger majority in parliament ahead of Brexit negotiations means that two of Europe’s traditional leadership powerhouses are full of distractions and ineffective in their leadership roles. There seems to be a contagion effect from so much political discord across Europe, as evidenced by the recent leadership crises in Spain and even in Ireland, where the minority government nearly collapsed after accusations surfaced that the Deputy Prime Minister might be implicated in the mishandling of a police whistleblower case.

Despite the growing geopolitical instability, equity markets and cryptocurrencies have marched ever higher, turning a blind eye to what appears to be an accelerating environment of risk. When Bitcoin begins trading in the Futures market on Sunday night, the already extreme volatility that it experienced this week could grow even more pronounced. Analysts and media personalities alike have been sounding the warning bells all week as Bitcoin has surpassed valuation levels that have been described as “a joke”, “a fraud”, “ridiculous” and “unsustainable”. Many media personalities drew comparisons between Bitcoin and the famed Dutch Tulip Mania in the 1600s or the Beanie Baby craze that took hold during the 1990s.

Savvy investors have continued to diversify their portfolios away from overexposure to any single asset class, particularly equities and cryptocurrencies which have reached record bubble heights. These investors have sought out other tangible, physical hard assets that might offer some shelter for their portfolios when the equity and cryptocurrency bubbles finally collapse. One such asset that savvy investors continue to accumulate to aid in diversifying their portfolios is physical precious metals. As the Bitcoin craze surged this week, an accompanying dip in precious metals prices appeared to be offering a buying opportunity for investors to accumulate more product for their portfolios at a discount.

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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