The Precious Metals Week in Review – May 24th, 2019

1. The rapidly deteriorating trade relationship between the U.S. and China was of primary focus this week, followed by further deterioration in the Brexit negotiation process in Europe.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 1,000 claims to a level of 211,000 from the previous week’s unrevised level of 212,000 for the week ending May 18. The four-week moving average of claims dropped by 4,750 claims to reach a new level of 220,250. The previous week’s moving average was also unrevised.

3. New orders for U.S. core capital goods fell in April by more than economists expected. Orders for so-called “durable goods” which include such items as appliances all the way up to aircraft, fell by 2.1%, indicating that the manufacturing sector, and perhaps the US economy as a whole, may be slowing after a growth spurt experienced in the first quarter. The U.S. Commerce Department announced on Friday that orders for non-defense related capital goods, excluding aircraft, fell 0.95% last month due to weakening demand. Data for March was revised lower, showing capital goods orders only slightly increasing by 0.3% instead of the previously reported 1%.

4. The ongoing trade war between the U.S. and China escalated further this week and it appears that any semblance of talks or negotiations have apparently ceased altogether. Yale University senior fellow Stephen Roach, who lived in China for 5 years while serving as Morgan Stanley Asia’s chairman, told CNBC’s Trading Nation on Wednesday that “the odds of a deal are rapidly receding. We have to be less hopeful now.” Mr. Roach believes that the U.S. is playing a dangerous game as the tensions escalate and said “China historically has a deep sense of feeling humiliated at the hands of the West dating back to the Opium Wars of the mid-19th century. This is a tough chip on China’s shoulder, and the last thing it wants to do to its leadership is to demonstrate to its constituents that it’s caving in to the West.”

5. Gao Feng, a spokesperson for China’s Ministry of Commerce, said on Thursday that “If the U.S. would like to keep on negotiating it should, with sincerity, adjust its wrong actions. Only then can talks continue.” Gao continued, saying “The U.S. …crackdown on Chinese companies not only seriously damages the normal commercial cooperation between both countries, but it also forms a great threat to the security of the global industrial and supply chains. China is firmly opposed to this. We will closely monitor developments and make adequate preparations.”

6. On Thursday, the Trump administration announced a new $16 billion trade aid program for American farmers that have been hurt by the ongoing trade war with China. Agriculture Secretary Sonny Perdue said during a press call on Thursday that “The package we’re announcing today ensures that farmers will not bear the brunt of those trade practices by China or any other nation.” The package would include cash payments of nearly $14.5 billion to dairy, pork, and crop producers impacted by China’s retaliatory tariffs on the U.S. The program is reportedly going to use the revenue from the U.S. tariffs on Chinese goods to support the payments. Other programs were announced as part of the aid package, including bulk purchases of fresh produce and other products by the government that will reportedly be used to support food banks, pantries and school meal programs.

7. On Friday morning, Britain’s Prime Minister Theresa May announced she would be resigning her post effective June 7. Her exit likely means the Brexit process will be further mired in bureaucratic red tape. Silvia Dall’Angelo, Senior economist at Hermes Investment Management, told CNBC on Friday after May’s announcement that “a new leader would not really resolve the current stalemate because it is likely that he or she will come from the more intransigent, euroskeptic side of the Tory party while the parliamentary arithmetic has not really changed.” Dall’Angelo continued, saying “Therefore, the risk is that with a new leader, the institutional tensions between the prime minister and Parliament will, if anything, increase. This in turn could lead to a government crisis, general election and more uncertainty down the road.” Saker Nusseibeh, chief executive of Hermes Investment Management, said in a research note that he published on Friday that the U.K. was “no nearer to an end of this uncertainty with the fabric of British politics shredded by the emotive debate over the past three years and the balance of negotiating power between the U.K. and the EU unchanged.”

8. Oil prices were on track for their largest weekly loss of 2019 on Friday ahead of a long holiday weekend in the U.S. and U.K. Rising inventories and escalating concerns over a global economic slowdown sent Brent crude back below the $70 a barrel range, with West Texas Intermediate (WTI) falling under $60 a barrel. U.S. crude inventories have surged to their highest levels since July of 2017 as refining usage in the Midwest region of the country dropped to its lowest levels for May since 2013.

9. The euro drifted sideways against the U.S. dollar for most of the week until Theresa May announced that she would be resigning as Prime Minister of the U.K. on June 7. The euro initially plunged on her announcement but quickly spiked to its highs for the week, drifting higher into the close on Friday. The Japanese yen spiked immediately higher at the open this week, then quickly dropped back near even before embarking on a gradual slide to the downside that lasted through Tuesday evening. The yen began a recovery move late on Tuesday and on Thursday spiked to its highs for the week against the U.S. dollar. The yen drifted sideways through late trading on Thursday and another climb higher near the close on Friday will ensure that the yen closes at its highs for the week against the U.S. dollar.

The old “sell in May and go away” adage may return for equity markets this year, according to one Wall Street analyst. Masanari Takada, a strategist for Nomura, said in a note to clients that “Investors should be focused on the potential downside for global equities in the near term, given that sentiment is still pointing down. We think a second wave in the selloff may still be coming and with risk-parity funds due to rebalance their portfolios at the end of the month as well (presumably selling stocks and buying bonds), we think it best to be on guard for a jump [in volatility]” within the next week.

JP Morgan slashed its forecast for second-quarter GDP growth to just 1% this week. The previous estimate was for a growth figure of 2.25% and the downgrade was apparently due to the escalating uncertainty over the trade war between the U.S. and China and its potential impact on sentiment and activity for U.S. businesses. Economists for JP Morgan wrote that “The April durable goods report was bad, particularly the details relating to capital goods orders and shipments. Coming on the heels of last week’s crummy April retail sales report, it suggests second quarter activity growth is sharply downshifting from the first quarter pace.”

The rising tensions in the trade dispute between the U.S. and China has begun to be called an all-out “trade war” and is being billed as the next “Cold War” – a reference to the tense relations between the U.S. and the Soviet Union following the end of World War 2. CNBC contributor Ron Insana wrote an editorial piece essentially saying that the market is failing to recognize what is “playing out on the world’s stage” as the U.S. and China escalate their dispute. Mr. Insana said “This is not a trade war. The markets have been slow to recognize the high-stakes game that’s playing out on the world stage. If this were just about bilateral trade deficits with China, the U.S. could easily sell more agricultural and energy products to China and narrow the gap by hundreds of billions of dollars. Instead, this is, as some surmise, a new Cold War to determine who will be the hegemonic power – economically and militarily – in the years to come.”

In Europe, Brexit has been pitched back into chaos as U.K. Prime Minister Theresa May announced her resignation effective June 7. Most political analysts feel that the next Prime Minister may likely be Boris Johnson, who is a staunch supporter of the U.K. exiting the E.U. and has publicly said that he supports a disorderly exit for the U.K. if Parliament cannot agree upon a Brexit package. Even under a new Prime Minister, the parliament remains the key barrier to reaching a viable withdrawal agreement with the E.U. JP Morgan appears to be convinced that Boris Johnson will win the race to be the next leader of the U.K. and that once he assumes power, he will call a general election in an attempt to gain additional support for exiting the EU.

Italy too may be facing a governmental crisis in the near future as its current coalition government is showing signs of stress. Many political analysts feel that the growing public differences between the members of the coalition may be nothing more than gamesmanship ahead of EU parliamentary elections in a play for one side to garner more support over the other.

The Middle East remains an area of concern as well. Trump announced on Friday that he would be sending roughly 1500 troops, drones and fighter jets to the region. The move follows on the heels of an announcement earlier this month that he had ordered the deployment of an aircraft carrier strike group, bombers and Patriot missile batteries to the Middle East on credible intelligence that Iran may be preparing to “attack U.S. forces or interests.” Reports also surfaced late on Friday that the Trump administration “citing tensions with Iran”, had set up multi-billion-dollar weapons sales to Saudi Arabia and the UAE, bypassing the Congressional review process. Reuters reported the news, citing only “senators” as having provided the information.

As trade, economic, and geopolitical uncertainties continue to increase, savvy investors remain committed to taking steps to ensure that their portfolios are appropriately diversified away from overexposure to equity markets, which are showing renewed signs of correction. Many investors have been steadily acquiring physical precious metals for their portfolios as their prices have remained suppressed – especially as global uncertainty remains on the rise.

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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