The Precious Metals Week in Review – May 10th, 2019

1. Escalating tensions in the trade talks between the U.S. and China sent markets lower as President Trump threatened to enact a tariff increase on Chinese goods beginning Friday. When the U.S. followed through on its threat at midnight on Friday morning, stocks plunged as equity markets apparently had not been pricing in the fact that the deal could collapse so quickly.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 2,000 claims from the previous week’s unrevised level of 230,000 for the week ending May 4. The four-week moving average of claims increased by 7,750 claims to reach a new level of 220,250. The previous week’s moving average was also unrevised.

3. On Sunday, President Trump threatened to increase tariffs on $200 billion worth of Chinese goods by 25% beginning at midnight on Friday. The news came as a surprise to most analysts, since the administration has spent recent weeks talking about how the ongoing trade talks between the U.S. and China were making “good progress.” Trump also threatened to impose another set of 25% tariffs on an additional $325 billion worth of Chinese goods “shortly.” A delegation of negotiators from Beijing are still slated to visit Washington, D.C. Thursday and Friday and is reported to included Vice Premier Liu He so there remains a chance that Trump’s move is just another example of brinksmanship designed to gain further concessions from the Chinese.

4. At midnight on Thursday night, with no trade deal immediately forthcoming, the U.S. followed through on its threat to hike tariffs on $200 billion in Chinese goods to 25%. China’s Commerce Ministry immediately reacted to the news, saying that it would immediately introduce “countermeasures” in retaliation for the move by the U.S., but the Ministry declined to say what specific steps would be taken.

5. The bond market began flashing warning signs that a recession might be imminent after all when it was reported that the trade discussions between the U.S. and China appeared to be rapidly deteriorating. The yield on the 10-year Treasury fell below the 3-month yield – commonly referred to as an “inverted yield curve” – and economists who just a week ago were saying there was no recession in sight began to immediately walk back their previous statements.

6. Iran threatened on Wednesday to back out of commitments it agreed to in the 2015 nuclear deal known as the Joint Comprehensive Plan of Action (JCPOA) which was struck under President Obama. The move was in response to the crippling sanctions placed on Iran by the U.S. after it backed out of that agreement and gives Europe just 60 days to negotiate a solution to protect Iran from the effects of those sanctions. Iran is threatening to keep its nuclear fuel instead of selling it as the JCPOA calls for and to restart construction on its Arak nuclear reactor – one which would have the capability of generating weapons-grade plutonium. If Iran follows through on these threats, it could prompt the U.S. to introduce even more aggressive sanctions or other countermeasures, creating an escalating situation that could devolve into outright hostilities in the Middle East once more.

7. Europe immediately responded to Iran’s threat to quit complying with some of the restrictions of the 2015 nuclear deal it signed on to by saying “We reject any ultimatums and will assess Iran’s compliance on the basis of Iran’s performance regarding its nuclear-related commitments under the JCPOA and the NPT.” The NPT refers to a treaty on the Non-proliferation of weapons. The EU’s joint statement went on to say “We remain fully committed to the preservation and full implementation of the JCPOA, a key achievement of the global nuclear non-proliferation architecture, which is in the security interest of all.”

8. Turkey’s central bank had to step in to save the lira once more as it plunged to eight-month lows. The collapse of the trade negotiations between the U.S. and China appears to have added downward pressure to the already fragile lira which has suffered from a renewed flight of investor capital over the last few months amid fears of further political intervention and dwindling foreign currency reserves.

9. Oil prices were supported this week by tighter supply constraints as continuing production cuts by OPEC and U.S. sanctions on both Iran and Venezuela kept supply conditions tight. Brent crude edged up just over $70 while West Texas Intermediate attempted a push into the mid-$60 per barrel range. Despite Friday’s upward moves, both contracts were on track for a losing week as the trade frictions between the U.S. and China increased.

10. The euro dropped at the start of trading for the week but immediately began a recovery, bringing it back to near even against the U.S. dollar by mid-morning on Tuesday. The euro tumbled lower again late Tuesday, but quickly recovered ground once more and drifted mostly sideways through trading on Thursday. When it became clear on Thursday that the hoped-for U.S.-China trade deal was nearing collapse, the euro spiked to its highs for the week. Despite a slight sell-off after reaching its highs, the euro appears to have enough momentum to close the week out to the upside against the U.S. dollar. The Japanese yen spiked briefly higher against the U.S. dollar at the start of trading for the week, then quickly fell to its lows for the week. The yen recovered ground immediately and began a slow and steady move to the upside that lasted the rest of the week. The yen will close out the week higher against the U.S. dollar.

The collapse of the ongoing trade negotiations between China and the U.S. will likely continue to trigger market volatility, particularly in equities. The uncertainty surrounding the state of trade between China and the U.S. could spread further into each country’s economies. Retailers who had begun to feel certain that an end was in sight to the tariffs they are having to pay for some of the products that their businesses depend on suddenly are now faced not only with a continuance of those tariffs, but a fairly dramatic increase as well as many of them move from 10% to 25%.

Representatives from both countries continued their discussions on Friday in spite of the fact that the U.S. had already followed through on its threat to increase its tariffs. Friday’s discussions were described by Treasury Secretary Steven Mnuchin as “constructive discussions between both parties, that’s all we’re going to say. Thank you.” Both Mnuchin and U.S. Trade Representative Robert Lighthizer met with China’s top trade negotiator, Liu He, on Friday and all involved seemed to part ways on amicable terms. Despite the increase in tariffs, the two countries still have time to make a breakthrough in their talks before the effects are felt in each others’ economies. The new tariffs will not be assessed on goods that shipped from China to the U.S. prior to May 10 which effectively gives both sides roughly two weeks to strike a deal before wholesalers, retailers and consumers alike begin to feel the impact.

The U.S. trade deficit widened in March, spreading to $50 billion as demand for foreign goods boosted imports amid growing feelings that a trade deal was close to being struck between the U.S. and China. In Europe, the European Commission estimates that Italy could breach its obligation to keep its budget deficit at or below 3% as soon as 2020. The Italian government slammed the Commission’s estimates, calling them “ungenerous” and even “bogus.” The EU also slashed its growth estimates for Germany again, though it did say that it expects the second half of the year to be “better” for what is one of the bloc’s leading economies. The EU projects that Germany’s economy may only grow at 0.5% this year.

The Middle East may be on the verge of spiraling into further tensions later this year. Iran, suffering under pressure from U.S. sanctions since the U.S. decided it would no longer participate in the so-called “Iran nuclear deal” last year, announced that it would back out of some key commitments of the agreement if Europe did not act within 60 days to help protect it from those sanctions. The EU has said that it will not bow to ultimatums, which could open the door for the entire agreement to fall apart. If Iran resumes enriching reactor fuel, the U.S. will likely ramp up the pressure in the form of additional sanctions against them.

The global geopolitical situation remains fraught with uncertainty. Bond markets in the U.S. have begun to flash warning signs of recession, with the 10 year yield falling below that of the 3 year – a so-called “inverted yield curve” – which has historically been a harbinger of a recessionary environment. In such uncertain times, savvy investors continue to seek out methods for ensuring that their portfolios remain diversified against a sudden decline in equity markets. One such diversification play has been to acquire assets that are considered “unloved” and “beaten down” while a temporary drop in prices has afforded them the opportunity to do so at a discount.

Many investors have steadily increased their holdings of physical precious metals in an attempt to make sure that their portfolios are sufficiently diversified to protect them from a drop in equity 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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