The Precious Metals Week in Review – June 7th, 2019

1. Trade disputes continue to be of primary concern to markets and to the global economy as a whole.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment was 218,000 for the week ending June 1, which was unchanged from the previous week’s revised level. The previous week’s data was revised higher by 3,000 claims. The four-week moving average of claims dropped by 2,500 from the previous week’s revised average to reach a new level of 215,000. The previous week’s moving average of claims was revised higher by 750.

3. Economists, polled by Dow Jones ahead of the release of the Nonfarm Payrolls Report for May in the U.S. had expected the addition of roughly 180,000 jobs and were shocked to see a headline number of just 75,000. The job counts for both March and April were also revised lower, with March moving from 189,000 down to 153,000 and April moving from 263,000 down to 224,000. Despite the lower-than-expected number and the downward revisions to the two previous months’ data, unemployment in the U.S. remains at a 50-year low of 3.6%. The weaker-than-expected report also spurred hopes among stock analysts that the Federal Reserve may decide to begin implementing rate cuts instead of remaining in its current holding pattern on interest rates.

4. The cloud of uncertainty surrounding the Trump administration’s decision to use tariffs as a primarily political weapon to basically browbeat its allies into making concessions that one-sidedly favor the U.S. has continued to grow as the deadline for the possible implementations of tariffs on Mexican goods looms large. According to President Trump’s surprise announcement last week, tariffs on some Mexican goods are due to go into effect on Monday, barring some sort of agreement between the two countries on how to control rampant illegal immigration into the United States.

5. On Wednesday, White House trade advisor Peter Navarro said that the tariffs announced by President Trump last week on Mexico “may not have to go into effect” on Monday, depending on the outcome of ongoing talks between U.S. and Mexican officials. Trump also told reporters on Wednesday “I think they [Mexico] want to do something, they want to make a deal. We’ll see what happens.” Should President Trump use the scope of his emergency powers to try to impose those tariffs, the possibility remains open that Congress could try and schedule a vote to block him and prevent those tariffs from going into effect.

6. Famed billionaire hedge fund investor Stanley Druckenmiller gave an interview on CNBC’s “Squawk Box” on Friday where he laid out the issues that he sees facing both the global economy and the U.S. economy and what effect the Fed’s past interest rate moves have had. Druckenmiller believes that the Fed should have raised rates further in 2016 when the opportunity was still available to do so. Druckenmiller said “We are in worse shape for a recession now than if things had slowed down. The biggest problem is what [Janet] Yellen did. We had a booming economy, fairly early cycle. I know I talk too much about the Fed, but at the time I said they should sneak one [rate hike] in every time they can until they get to some normal rate. We had that whole period in 2016 where, in my opinion, they could have gotten to 3.5 or 4. We’ll never know but they could have at least tried.” Druckenmiller firmly believes that the Fed’s failure to raise rates earlier was directly responsible for the record corporate debt levels we now see. Druckenmiller said “I deeply, deeply believe in a capitalist system you need a hurdle rate for investment and if that rate is not up there around 3 or 4, people are going to get crazy. Investors are going to get crazy, corporations are going to get crazy, zombies are going to stay in business, and we had the opportunity to get there.”

7. Eyes are on the Fed for indications on what it will do with interest rates at its next meeting which takes place June 18 and 19. Tony Dwyer, Canaccord Genuity’s chief market strategist noted that yields on the 2, 5 and 10-year Treasurys are all below the lower bound of the Fed’s target range for them and that moves in the markets may force the Fed into a rate cut earlier than expected. Dwyer told CNBC’s “Trading Nation” on Tuesday that “The market is going to force them into it. All the inflation indicators are collapsing. That is telling them they have room to ease.” On Monday, St. Louis Federal Reserve President James Bullard seemed to echo the same thought, saying that weak inflation data and increasing global trade tensions might call for a rate cut. Tony Dwyer apparently believes that such a cut may take place as early as this month’s Fed meeting.

8. Theresa May officially stepped down from her post of Prime Minister of the U.K this week and will remain on as “Prime Minister Caretaker” until her replacement can be found, which could take up to six weeks. The confusion surrounding Brexit is only likely to increase during the intervening time.

9. Oil prices got a bit of a lift on Friday as news broke that OPEC was possibly near an agreement to extend its output production cuts beyond the initial June target. Both U.S. and Brent crude had been on track for their third weekly decline before the news broke and sent the two indexes higher. Brent crude closed just over $63-per-barrel and U.S. West Texas Intermediate (WTI) closed just under $54.00-per-barrel. Saudi Arabia’s Energy Minister, Khalid al-Falih, told a conference in Russia that OPEC and its allies were close to agreement on the extension of the cuts but that further talks were required with non-OPEC countries that were part of the deal.

10. The euro dipped briefly against the U.S. dollar at the start of trading for the week but soon began a fairly steady trend to the upside that saw it close near its highs for the week on Friday. The euro closed out the week to the upside against the U.S. dollar. The yen had a relatively wild ride against the U.S. dollar this week, sinking and spiking within a narrow band that began trending generally downward on Tuesday. Late on Friday, the yen spiked vertically higher before edging lower again and will close out the week slightly to the upside against the U.S. dollar.

The Dow Jones Industrial Average had moved over a thousand points higher from its close on Monday by the time the end of trading arrived on Friday. The jump seemed to be counterintuitive given the mostly weak economic data that was reported this week, especially the continued slowdown in the U.S. jobs market. Much of the move was attributed to three things: hopes that the U.S. would call off its proposed tariffs on Mexico when talks conclude between each country’s officials over the weekend; the European Central Bank announcing that it would now not conduct what will be its first interest rate hike in the post-crisis environment until the middle of next year, at the minimum; and growing market hopes that the Federal Reserve will reverse course and begin cutting interest rates again since it appears that they cannot hit their inflation target.

The fact that none of the aforementioned items is particularly conducive to lowering the record amounts of corporate debt across the world is being studiously ignored by stock markets in favor of greed for more “cheap money” to help fuel the ongoing bubble in equities. Corporations, whose balance sheets are already loaded with debt due to their own addiction to “cheap money” will almost certainly view another turn-down in interest rates as just an opportunity to borrow even more heavily.

The inverted yield curve in U.S. Treasurys continues to signal that a recession could be on the near-term horizon and yet most stock analysts seem completely unconcerned that current corporate debt levels would spell disaster in the midst of another recession. Morgan Stanley commented on this very point this week, pointing out in a research note that “Investors are generally of the view that the trade dispute could drag on for longer, but they appear to be overlooking its potential impact on the global macro outlook.” The note, written by Chetan Ahya, the investment bank’s chief economist, went on to warn that if the U.S. follows through with its plan to place further tariffs on Chinese goods, “we could end up in a recession in three quarters.”

The dispute between the U.S. and China took a turn for the worse this week when China released a white paper that said that current disruptions to trade were launched by the U.S. and have negatively impacted the rest of the world’s ability to trade. The paper went on to classify the U.S. as an untrustworthy negotiator and claimed that Beijing wants talks with the U.S. that are equal, mutually beneficial and trustworthy. At a press conference on Sunday, Vice Commerce Minister Wang Shouwen said “During the consultations, China has overcome many difficulties and put forward pragmatic solutions. However, the U.S. has backtracked, and when you give them an inch, they want a yard.” President Trump told reporters on Thursday that “Our talks with China, a lot of interesting things are happening. We’ll see what happens. I could go up another at least $300 billion and I’ll do that at the right time.” Trump said further “I think China wants to make a deal and I think Mexico wants to make a deal badly.”

The International Monetary Fund weighed in on Wednesday, pointing out that the tariffs between the U.S. and China that have already been proposed and/or implemented could cut the global economic output by as much as ½ a percent in 2020.

Investors seeking diversification in their portfolios that could help protect them from another global recession have continued to accumulate physical precious metals while those assets have remained unloved and undervalued. These investors have continued adding physical precious metals to their portfolios whenever temporary price dips have afforded them a buying opportunity to do so at a discount.

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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