The Precious Metals Week in Review – January 12, 2018

1. The first full week of trading in 2018 saw the cracks start to appear in at least one of the bubbles that expanded to epic proportions in 2017 – Bitcoin. The cryptocurrency was hit hard by several regulatory announcements around the world, and a report that South Korea might be considering an outright ban on the trading of cryptocurrencies. Next week will once again be a shortened trading week due to the Martin Luther King holiday in the United States.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment rose by 11,000 claims, coming in at 261,000 for the week ending January 6. The previous week’s level was unrevised. The four-week moving average of claims increased by 9,000 to a new level of 250,750 from the previous week’s unrevised average. Claims taking procedures in both the Virgin Islands and Puerto Rico have still not returned to 2017 pre-hurricane norms despite months of infrastructure repair work.

3. A report surfaced on Wednesday at Bloomberg News that China may be considering slowing, or even halting, its US Treasury purchases. The report said, citing “people familiar with the matter”, that Chinese officials think U.S. debt is becoming less attractive compared with other assets and that trade tensions between China and the U.S. could provide a valid reason to slow or halt the purchases. Treasury prices fell, along with the U.S. dollar, on the news as gold began to climb. China’s foreign exchange regulator said Thursday that the Bloomberg report may have “quote[ed] the wrong source of information, or may be fake news.” China is the largest foreign holder of U.S. government debt, holding $1.19 trillion in Treasuries as of October 2017.

4. The U.S. House Foreign Affairs Committee passed two bills on Tuesday that are apparently aimed at strengthening the U.S.’ relationship with Taiwan. One bill, the Taiwan Travel Act, would allow for high level visits between Washington and Taipei “at all levels of government”, which could allow for official visits to the White House by Taiwanese leaders. No Taiwanese leader has formally visited the White House since 1979 when the U.S. established diplomatic ties with China. China maintains that Taiwan is nothing more than a rogue province and refuses to recognize its independence. An op-ed that appeared on Wednesday in The Global Times said, “The mainland will surely act to make sure Taiwan and the U.S. pay the price for their high-level exchanges.” The piece continued, saying “Beijing’s diplomatic retaliations toward Washington will come from all sides. This will multiply exponentially the costs, for the U.S., of handling global affairs and make the country profoundly realize that the Taiwan question is the Chinese mainland’s bottom line that it cannot afford to touch.”

5. North Korea’s only known underground nuclear test site is showing signs of activity again. Satellite images appear to show excavations and “significant tunneling” in a region of the facility that was not used in previous nuclear tests last year. In October, reports surfaced that the site had become unstable and experienced several tunnel collapses that are rumored to have killed hundreds of North Korean workers. If the image analysis is correct, the North may be excavating new test tunnels at the west end of the site with the obvious goal of carrying out continued tests of their nuclear capabilities.

6. North Korean and South Korean negotiators met at the Demilitarized Zone (DMZ) on Tuesday in the first high-level talks between them since late in 2015. The negotiations apparently resulted in Pyongyang agreeing to send a delegation of athletes to the Winter Olympic Games in PyeongChang, South Korea in February. As earlier reported, the two sides also agreed to reactivate a military hotline for the purposes of holding future talks. There was no apparent discussion on the denuclearization of North Korea.

7. Coalition party leaders in Germany have apparently reached a “breakthrough” in their talks to form a new government, months after Angela Merkel won reelection as Chancellor but failed to capture an overall majority. Merkel and leaders from her party engaged in talks with rival Social Democratic Party leaders and the negotiations apparently resulted in real progress towards finally forming a functional German government. It remains to be seen if these new discussions will remain civil and finally lead to a fully functioning government for one of the EU’s strongest members.

8. Crude oil posted its fourth consecutive weekly gain this week, closing above $64 after Russia’s oil minister, Alexander Novak, said that global crude supplies were “not completely balanced yet” and that ministers from leading OPEC and non-OPEC oil producers would be discussing the status of the production caps at an upcoming committee meeting.

9. The euro took a brief bump higher against the U.S. dollar at the start of trading this week, but soon began an orderly drift lower that lasted through Wednesday afternoon. Early Wednesday afternoon, the euro took a brief vertical leap to the upside, but soon returned near the lows for the week. Early Thursday afternoon, the euro took another vertical leap higher and it continued to extend its gains through Friday trading. The euro will close the week higher against the U.S. dollar. The Japanese yen briefly dipped lower against the U.S. dollar at the start of the week, but by Monday morning it began a march to the upside. Despite a brief dip on Thursday and another on Friday, the yen still appears set to close the week higher against the U.S. dollar.

The Dow Jones Industrial Average closed in on 26,000 this week, just a week after breaking through the 25,000 mark, as the ongoing bubble showed signs of further acceleration towards the breaking point. David Rosenberg, chief economist and strategist at Gluskin Sheff, urged caution as stocks continued to set records. Mr. Gluskin, in a daily note to clients, said “The bull market continues unabated and is taking on a speculative tone in the process.” Mr. Rosenberg continued, speculating on whether the Fed would “remain a serial bubble blower” under the leadership of Jerome Powell and multiple new Fed appointees all slated to take over in 2018. Blackstone Private Wealth Solutions’ vice chairman Byron Wien apparently agrees that stocks are in strong bubble territory. Mr. Wien said on CNBC this week that “Sentiment is bordering on the euphoric state. When investors think they can’t get into trouble, they usually do. We’re vulnerable to a correction.” Mr. Wien continued, saying “The market needs to have some kind of correction. There are some excesses in it, so I fully expect it to happen.” Mr. Wien apparently expects that a correction of between 10 and 15 percent is unavoidable.

Volatility in cryptocurrencies was also more pronounced this week as regulators around the world showed signs of taking a larger supervisory role and even possibly limiting the ability to trade cryptocurrencies altogether. Bitcoin alone lost 7% in a single day as the rumors persisted.

North Korea made the surprise move of opening negotiations with South Korea at the Demilitarized Zone this week and came away with an agreement allowing them to send a delegation of athletes to the Winter Olympic games next month in South Korea. The two Koreas also agreed to reestablish a military hotline that had been shut down since 2015 as relations between the two continued to sour.

In Europe, a new study commissioned by the Mayor of London modeled 5 different scenarios for the United Kingdom’s upcoming exit from the European Union. The worst-case scenario showed a departure in March of 2019 having reached no deal with the EU on any trade or transition agreements. That scenario, the study shows, could result in the loss of 46.8 billion pounds in investment by 2030 and the loss of 482,000 jobs. Mayor of London Sadiq Khan said that Britain could be heading for its own “lost decade” of lower growth and lower employment in a post-Brexit era, saying “Ministers are fast running out of time to turn the negotiations around.” Under no scenario in the study did the U.K. economy escape without harm, but the actual severity of economic damage will remain an unknown factor until negotiations are closer to their final outcome. The calculations used in the study appear to also be in line with a similar assessment commissioned by the International Monetary Fund and the National Institute of Economic and Social Research before the U.K. even held its referendum on leaving the Union.

According to a new poll, roughly half of British voters now believe that Prime Minister Theresa May is not capable of successfully negotiating the “right” Brexit deal. Reports also surfaced early in the week that Ms. May was looking to appoint a new cabinet minister for a “no deal” Brexit.

In the U.S., core consumer prices apparently posted their largest gains in 11 months as rental accommodation and health care costs surged. The surge reinforced analyst opinions that inflation could be set to take hold this year, justifying further rate hikes by the Federal Reserve.

As bubbles continue to inflate in both equities and cryptocurrencies, wise investors have continued to make efforts to keep their portfolios diversified to avoid extreme overexposure to any single particular asset class. Savvy investors have continued to accumulate physical precious metals as a means to keep their portfolios diversified, and also to hedge against the potential that inflation could start to skyrocket.

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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