The Precious Metals Week in Review – January 19, 2018

1. This week was a shortened trading week in the United States due to the Martin Luther King holiday. The bubble in equities continued to accelerate this week, but the cracks in cryptocurrencies appeared in earnest this week as Bitcoin saw its value plunge on further rumors of crackdowns on the trading of virtual currencies across the globe. The U.S. Congress, true to what has seemingly become the norm over the last decade or so, remained dysfunctional and gridlocked until the expiration of the continuing resolution that kept the government functioning through the end of this week.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment plummeted by 41,000 claims, coming in at 220,000 for the week ending January 11. The previous week’s level was unrevised. The four-week moving average of claims dropped by 6,250 to a new level of 244,500 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. Unemployment data should be expected to remain volatile through the first several months of the year as severe winter weather and the lingering effects of seasonal employment terminations work their way through the system.

3. The continuing resolution to keep the U.S. government operating while an actual budget continues to be under negotiation runs out at midnight on Friday, January 19. The U.S. Congress struggled to overcome the dysfunction and gridlock, that has plagued it for the better part of a decade now, to come to an agreement on extending the resolution. The House of Representatives passed its version of a new continuing resolution late on Thursday, but the Senate appears set to block any further governmental spending using such resolutions. In other words, the Senate appears ready to trigger another U.S. government shutdown, the third since 2011.

4. The bubble in equities continued to skyrocket this week, as the Dow Jones Industrial Average eclipsed the 26,000 mark, just barely a week after passing 25,000. Investors have apparently approached “mania” stage and cash is pouring into the bloated equities market at record levels as these investors seem to experience a full blown “fear of missing out” on further gains. According to recent investor intelligence surveys, so-called “bulls” outnumber the “bears” by a margin of 66.7 percent to 12.7 percent, the largest such spread since 1986.

5. China’s economy grew by 6.9% in 2017, according to official figures released on Wednesday. The growth topped both economists’ estimates and official guidance. Beijing is apparently keeping its growth target at “around 6.5 percent” for 2018 according to a Reuters report which cited anonymous policy sources. China’s economy remains heavily exposed, as does much of the world’s economies, to massive debt levels that have continued to skyrocket as the world struggles to recover from the financial crisis that began with 2008’s U.S. housing market collapse.

6. Rumors abounded this week that both China and South Korea intend to heavily clamp down, if not an implementation of an outright ban, on the exchanges that allow for the trading of virtual currencies, commonly called crypto currencies. Bitcoin, one such virtual currency, saw its price plummet on the crackdown news, briefly dipping back below $10,000 as investors ran for the exits to find less volatile assets. One of those assets appears to have been physical precious metals like Gold and Silver, as online sources for purchasing those products reported a surge in buying that coincided with Bitcoin’s collapse this week.

7. North Korea abruptly cancelled a planned visit by a delegation of seven members to South Korea without explanation. The delegation was due to visit South Korea on Saturday to check potential performance venues for a North Korean art troupe that will be at the Winter Olympics next month. It was not immediately clear whether this cancellation would have any effect on the North’s newly agreed upon participation in next month’s Winter Olympic games.

8. On Tuesday, a 20-nation meeting took place in Vancouver, Canada to discuss North Korea’s continued pursuit of nuclearization. The group agreed to consider imposing additional unilateral sanctions on Pyongyang that would go farther than current sanctions imposed by the United Nation Security Council. In a statement released after the meeting, the group said that they “agree to consider and take steps to impose unilateral sanctions and further diplomatic actions that go beyond those required by U.N. Security Council resolutions” but no specific details on additional sanctions were released from the meeting, which lasted just a single day.

9. Hawaii residents were panicked this weekend when their televisions, radios and cell phones all received communications that a ballistic missile was inbound, followed by the words “THIS IS NOT A DRILL”. It took Hawaii more than a half hour to reassure residents that the alert was a false alarm that had been triggered in error by an official testing the emergency broadcast system. Japanese TV had a similar problem on Tuesday when it issued a false alarm about a North Korean missile launch, but the error was corrected in a matter of minutes. The two events show just how on edge the world is over the stability of the Korean Peninsula and the growing fear over North Korea’s increasing nuclear capabilities.

10. Crude oil maintained its grip on the mid-$60-a-barrel range this week despite projections that U.S. crude output could break through 10 million barrels per day in the near future. In its monthly report, the International Energy Agency (IEA) said that while global oil supplies have tightened, “Explosive growth in the U.S. and substantial gains in Canada and Brazil will far outweigh potentially steep declines in Venezuela and Mexico.” The IEA projects that U.S. crude output could soon overtake that of Russia and Saudi Arabia.

11. The euro’s chart this week looked like a medical EKG. The euro surged higher at the start of trading, plunged back near even on Tuesday before immediately surging to a new high, then plunged back to a low for the week by late Wednesday, before surging higher again into Friday trading. The euro saw another reversal on Friday as the debate over the U.S. government shutdown continued, but it still appears set to close the week higher against the U.S. dollar. The Japanese yen showed a similar pattern to the euro, dropping to its low for the week on Thursday before surging higher through Friday trading. The yen did not see the same sort of reversal as the euro on Friday and will close the week out higher against the U.S. dollar.

The Dow Jones Industrial Average (DJIA) topped 26,000 in this shortened trading week as the equities bubble continued to accelerate its expansion. Bitcoin and other cryptocurrencies were roiled this week by continued rumors of crackdowns on the exchanges where they are traded, particularly in Asia. Bitcoin futures dropped by 20% as the crackdown fears escalated and reports surfaced that the U.S. Commodity Futures Trading Commission (CFTC) had filed fraud charges against three virtual currency operators, charging them with “fraud, misappropriation of funds, and misrepresentation, causing significant financial harm to investors.” As the cryptocurrency bubble showed signs of stress and increased volatility, analysts continued to celebrate the “unstoppable” bull market in stocks.

One asset management firm however, is going against the herd mentality and said this week that “Stocks are in complete bitcoin territory. Valuations on stocks sometimes feel like bitcoin because in a way it is totally disconnected from fundamentals. It’s purely based on sentiment and flows from central banks and the private passive investment community.”

Francesco Filia, Chief Executive at Fasanara Capital continued, saying “There is not one enterprise valuation that would say that this market is properly priced.” Other well-known analysts have made similar statements, saying that today’s stock market is “the most overvalued on record” as they compared today’s soaring equities markets to those of 1929, 2000 and 2007 – all years with significant and drastic corrections.

U.S. Stock markets have become so disconnected from fundamentals that even the fact that Congress showed very little signs of overcoming its dysfunctional nature to pass an additional Continuing Resolution to stave off another government shutdown next week could not keep markets down on Friday. The DJIA popped back over 26,000 late in the day even though the Senate was rumored to be willing to push its negotiations all the way up until the current Resolution expired at midnight on Friday.

In Europe, the United Kingdom’s second largest construction firm collapsed and went into compulsory liquidation on Monday as banks refused to lend it any additional money. The construction firm, named Carillion, employs roughly 43,000 individuals around the globe, half of those employees are located in the U.K. The firm’s collapse is likely to have extensive ripple effects since it acts as a lead or major partner on hundreds of projects including railways, military contracts and maintenance for hospitals, prisons and schools. Further effects will surely be felt by Carillion’s pension holders, who will likely see an immediate drop in their retirement income. Carillion primarily focuses on government-based contracts, but London’s housing market also appears to be cooling, which could impact similarly overextended residential builders there, which could spread contagion to other areas of the U.K. Uncertainty over post-Brexit housing needs, and higher taxes for home purchases have directly and negatively impacted home prices in London as potential buyers wait to see how they will be affected by the upcoming changes.

On Wednesday, the International Monetary Fund criticized Germany for maintaining its trade surplus instead of embarking on public spending projects which would ostensibly act to give a boost to other euro zone economies. Christine Lagarde, managing director of the IMF, wrote “We at the IMF see a particularly strong case to use headroom in the budget to invest more in public infrastructure, such as roads, railways, and digital infrastructure.” Lagarde continued, saying “We have also advised the [German] government to spend more on reforms that help women go back to work, such as opening more childcare centers and kindergartens. Our view is that higher growth in the long-term will improve prosperity, helping to offset the costs of an aging society.” Germany remains without a functional government as talks have continued to drag out between rival political parties to form a coalition government to be led by Chancellor Merkel, so any embarkation on spending projects is likely far in the future if they happen at all.

Savvy investors continue to seek opportunities to keep their portfolios diversified and avoid the “herd mentality” that seems to be taking hold of average investors. These wise investors view temporary price dips in precious metals as buying opportunities to acquire additional hard assets for their investment portfolios that they hope will diversify risk away from exposure to the overvalued equities and cryptocurrency markets.

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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