The Precious Metals Week in Review – May 31st, 2019

1. Escalating trade disputes between the U.S. and other nations of the world remain the primary driver for market volatility.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 3,000 claims to a level of 215,000 for the week ending May 25 from the previous week’s revised level. The previous week’s data was revised higher by 1,000 claims. The four-week moving average of claims dropped by 3,750 from the previous week’s revised average to reach a new level of 216,750. The previous week’s moving average of claims was revised higher by 250.

3. On Thursday President Trump upped the ante in the U.S.’ growing trade disputes with its historical trading partners. Trump tweeted Thursday evening that “On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country STOP. The Tariff will gradually increase until the illegal Immigration problem is remedied, at which time the Tariffs will be removed.” A White House statement later clarified the tweet, saying “If the illegal migration crisis is alleviated through effective actions taken by Mexico, to be determined in our sole discretion and judgment, the Tariffs will be removed. If the crisis persists, however, the Tariffs will be raised to 10 percent on July 1, 2019. Tariffs will be increased to 15 percent on August 1, 2019, to 20 percent on September 1, 2019, and to 25 percent on October 1, 2019. Tariffs will permanently remain at the 25 percent level unless and until Mexico substantially stops the illegal inflow of aliens coming through its territory.”

4. Mexican President Andres Manuel Lopez Obrador responded to the tariff announcement in a letter to President Trump, saying “President Trump: Social problems cannot be resolved with taxes or coercive measures. I propose to deepen the dialogue, seek alternatives to the immigration problem and, please, remember that I do not lack courage, that I am not cowardly nor timid but that I act on principles: I believe in the policy that, among other things, was invented to avoid confrontation and war.” Obrador requested that officials from the U.S. and Mexico begin meeting on Friday to attempt to “reach an agreement for the benefit of both nations.” The surprise announcement by the White House could put the new United States-Mexico-Canada Agreement that is slated to replace the original and now outdated NAFTA policy in jeopardy.

5. Following Trump’s Mexico tariff announcement, JP Morgan noted that the Federal Reserve is now likely to cut interest rates up to two times this year amid concerns over a global economic slowdown which could be aggravated by the U.S.’ tariff policies. Michael Feroli, the chief U.S. economist at JP Morgan, said in a client note that “If the Administration follows through on the proposed actions, we believe the adverse growth implications would prompt Fed easing. Even if a deal is quickly reached with Mexico, which seems plausible, the damage to business confidence could be lasting, with consequences that might still require a Fed response.” Feroli said that if the tariffs on Mexico hit the full 25% then the Fed may be forced to cut rates at both the September and December meetings.

6. President Trump’s surprise Mexico tariff announcement sent the U.S. 10-year bond yield plunging to 2.16%, renewing fears that an inverted yield curve could be signaling that a recession is imminent. Fears over an impending global recession were also stoked this week when the 10-year German bund yield hit negative 0.213%, its lowest level ever since record keeping began on the bund in 1988. The negative yield on the German 10-year bund effectively means that investors are effectively paying Germany interest on the money that they are lending to them through their bund purchases.

7. The stand-off between Italy and the European Union over Italy’s debt and budget deficits heated up this week. Reports surfaced that Rome could soon be faced with a disciplinary fine of roughly 3 billion euros for violating EU rules with the debt it has amassed and its budget deficits. Italy’s Deputy Prime Minister, Matteo Salvini, said that he would use “all of his energy” to fight “outdated and unfair European fiscal rules.” The European Commission is slated to review Italy’s finances again on June 5th.

8. Oil prices fell significantly on Friday after President Trump’s surprise tariff announcement with Brent crude falling over 3 and a half percent to close in the mid-to-lower $60 per barrel range. WTI crude fell over 5% dropping into the low $50 per barrel range. The tariffs announced by President Trump could significantly impact the cross-border energy trade between the U.S. and Mexico as U.S. refiners import close to 700,000 barrels of Mexican crude oil each day. The proposed 5% tariff would add nearly 2$ million to their daily costs to purchase those barrels.

9. The euro began a fairly steady plunge to the downside against the U.S. dollar as trading began for the week. The drop lasted through late Wednesday at which point the euro began a relative sideways drift that lasted through Friday morning. The euro reversed course on Friday after Trump made his surprise tariff announcement but could not gain enough momentum to climb back into positive territory and will close out the week to the downside against the U.S. dollar. The Japanese yen drifted mostly sideways throughout much of the trading week but began a slight decline late Wednesday that carried forward into Thursday afternoon. Late Thursday the yen began a relatively steep upward climb that took it into positive territory and the yen will close out the week higher against the U.S. dollar.

The U.S. opened another front in its ongoing trade war by announcing that it would be implementing new tariffs on Mexico starting in June over “national security” concerns. The announcement took markets, already shaken by the deterioration of the trade dispute between the U.S. and China, by complete surprise. The U.S. Congress was slated to begin the process of trying to ratify the new U.S.-Mexico-Canada-Agreement which was designed and drawn up to replace the outdated North American Free Trade Agreement and the very tariffs that Trump announced this week would likely be in direct violation of that agreement.

Officials for both Mexico and the U.S. were reported to be meeting on Friday to discuss solutions to avoid the tariffs announced by the White House, but the damage to the U.S.’ reputation as a reliable and dependable negotiating partner has already been damaged extensively. Business groups in the U.S. are already apparently lining up to sue the White House over the proposed tariffs and the U.S. Chamber of Commerce itself is also reported to be reviewing its legal options in response to the tariffs. When questioned over the potential upcoming legal battles, a White House spokesman told CNBC simply that Trump is “taking action within his authority to protect our national security.” The spokesman continued, basically deflecting blame back on the U.S. businesses themselves, saying “Industry should be in communication with their counterparts in Mexico to encourage the Mexican government to work with the administration and stave off the dangerous crisis at our southern border as quickly as possible.”

On the China front in the U.S.’ multi-front trade war, China announced this week that it will be establishing a list of “unreliable entities” containing the names of foreign companies and people that “seriously damage” the interests of its domestic firms. Gao Feng, a spokesperson for the Ministry of Commerce in Beijing, said on Friday “Foreign enterprises, organizations and individuals that do not comply with market rules, violate the spirit of contract, block or cut supplies to Chinese firms with non-commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises, will be added to the list of unreliable entities.” No specific countries, companies or individuals were mentioned, but after President Trump effectively shut Chinese telecom giant Huawei out of its ability to purchase chips and other supplies from U.S. companies last week, it can be no coincidence that China is contemplating doing something along the similar lines to U.S. companies.

In Europe, confusion still seems to reign over whether the United Kingdom will actually exit the bloc this year or not. Confusion will likely continue even after the U.K. gains its new Prime Minister. The European Commission may be gearing up to do battle with Italy once more over its budgetary shortfalls and is reported to be contemplating slapping a fine of up to 3 billion euros on Rome. Germany saw the yield on its 10-year bunds plunge into negative territory this week, dropping to record lows. The negative yield on those bunds essentially means it costs investors money to hold them, which makes no investment sense whatsoever.

Stocks plummeted on Friday after Trump’s surprise announcement, making for their worst multi-week losing streak since 2011. The U.S. 10-year yield inverted with its shorter-term siblings again this week, triggering analysts to immediately begin walking back their “no recession in sight” comments that they’ve been so fond of parroting lately. Despite the obvious signs of economic stress, these same analysts stuck to their guns, saying such an inversion of the yield curve does not necessarily mean that a recession is imminent “100 percent of the time.”

Savvy investors, watching the U.S.’ reputation steadily erode among its allies and trading partners, have continued to acquire physical precious metals as their prices have remained suppressed. These same investors view the historical role that precious metals have had as a “safe haven” in times of economic turmoil as remaining highly relevant in modern times. Many view physical precious metals as a means to diversify their investment portfolios away from overexposure to equity markets that have become more and more volatile of late.

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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