The Precious Metals Week in Review – July 19th, 2019

1. The battle over the U.S. debt ceiling has once again become a Congressional showdown, as was widely expected. The U.S.-China trade war also continues to remain largely unresolved and these two items alone are likely to trigger a significant increase in market volatility in the coming weeks.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 8,000 from the previous week’s revised level to a new level of 216,000 claims for the week ending July 13. The previous week’s level was revised lower by 1,000 claims. The four-week moving average of claims decreased by 250 from the previous week’s revised average to reach a new level of 218,750 claims. The previous week’s moving average was revised lower by 250 claims.

3. Larry Fink, Chairman and CEO of Blackrock, the world’s largest money manager, told CNBC this week that “We’re hearing from CEOs that more and more supply chains are moving out of China right now. People are not waiting, companies are not waiting to see what the outcome is.” The negotiation process between the U.S. and China appears to be slowing again, as evidenced by Beijing adding Zhong Shan, China’s commerce minister, to its negotiation team. Zhong Shan is seen as a hard-liner on China-U.S. trade issues. Zhong Shan has been quoted in the Chinese press on Monday as saying “The U.S. side has provoked economic and trade frictions against us and violated the principles of the WTO. It is typical of unilateralism and protectionism. We have to uphold our warrior spirit in firmly defending national and people’s interests in defending the multilateral trading system.” Donald Straszheim, head of Evercore ISI’s China research team, said in a note this week, “Trade progress has been in reverse. The two sides are further apart now than in Nov-Dec 2018.” Straszheim went on to say “A combination of substantial steps, partial actions and empty words which will be a relief but far from a final resolution of what has morphed from trade war to a ‘stop the China rise’ cold war.”

4. The battle over the U.S. debt ceiling has begun in earnest and appears set to prove out to be just as troublesome as it ever was under the Obama administration. Bloomberg News said this week that House Speaker Nancy Pelosi is rejecting the White House’s most recent proposal on the debt ceiling after it asked the Democrats to find a way to shave off $150 billion in spending cuts. Treasury Secretary Steven Mnuchin has urged Congress to pass a debt ceiling increase before it departs for Summer Recess on July 26 or possibly face the fact that the U.S. could run out of cash by September. Failure to pass another debt-ceiling increase could mean that the U.S. would be forced into another government shutdown and could begin defaulting on its debt payments, sacrificing its credit rating and compounding the problem into the future.

5. There was a mass of confusion over whether the Federal Reserve is truly intending to cut rates at its upcoming Federal Open Market Committee meeting at the end of July after New York Fed President John Williams delivered a speech on Thursday that seemed to indicate that the Fed might still cut rates by up to 50 basis points at the upcoming monetary policy meeting. The New York Fed seemingly reversed course on those comments later in the day. Williams said in his speech that policymakers need to “act quickly” as economic growth slows. The market immediately assumed that a larger rate cut could be on the table for this month, but a spokesman for the New York Fed said in a statement released later in the day that William’s remarks were “an academic speech on 20 years of research. It was not about potential policy actions at the upcoming FOMC meeting.”

6. President Trump took to Twitter after the confusion over Fed remarks on Thursday to criticize the Fed further. Trump said:

I like New York Fed President John Williams first statement much better than his second. His first statement is 100% correct in that the Fed “raised” far too fast & too early. Also must stop with the crazy quantitative tightening. We are in a World competition, & winning big,…

— Donald J. Trump (@realDonaldTrump) July 19, 2019

….but it is no thanks to the Federal Reserve. Had they not acted so fast and “so much,” we would be doing even better than we are doing right now. This is our chance to build unparalleled wealth and success for the U.S., GROWTH, which would greatly reduce % debt. Don’t blow it!

— Donald J. Trump (@realDonaldTrump) July 19, 2019

7. Oil prices moved higher on Friday, after suffering heavy losses the previous day, as tensions in the Middle East continue to escalate. Concerns that slowing global economic growth could lead to further oversupply conditions in crude oil had sent the sector on a path for its worst weekly loss since December. On Friday however, Iran’s Revolutionary Guard claimed to have captured a British tanker in the Strait of Hormuz after it allegedly “failed to follow international marine regulations.” The reports were later confirmed to be true after the company that owns the vessel released a statement saying that the ship had been “approached by unidentified small crafts and a helicopter during transit of the Strait of Hormuz while the vessel was in international waters.” The statement further said, “We are presently unable to contact the vessel which is now heading north towards Iran.” Other reports later in the day confirmed that Iran had, in fact, captured the vessel and was actively attempting to take a second one.

8. The U.S. National Security Council (NSC) addressed the issue over the Iranian seizure of a British oil tanker after reports were verified to be correct. NSC spokesman Garret Marquis said “We are aware of reports that Iranian forces seized a British oil tanker. This is the second time in just over a week the UK has been the target of escalatory violence by the Iranian regime. The U.S. will continue to work with our allies and partners to defend our security and interests against Iran’s malign behavior.”

9. The euro drifted sideways against the U.S. dollar at the start of trading for the week but had begun to trend lower by late Monday. On Tuesday the decline accelerated, moving to the lows for the week by late evening. The euro reversed course late Wednesday and began drifting higher through early Thursday trading when it experienced a steep, but short-lived, drop again. The euro bounced back into positive territory late Thursday evening, only to reverse course again and dip back near its lows for the week by Friday. The euro will close out the week lower against the U.S. dollar. The Japanese yen drifted basically sideways against the U.S. dollar through the first half of the week, drifting lower on Tuesday for a brief time before climbing its way back into positive territory. The yen touched its highs against the U.S. dollar for the week late on Thursday and then began a steady drift to the downside. Despite the drift lower through Friday, the yen appears set to close out the week slightly higher against the U.S. dollar.

A Reuters report late on Friday that a second British-operated tanker had suddenly taken a “sharp northerly turn” towards Iran after passing through the Strait of Hormuz and into the Gulf further escalated tensions between Iran and the West as the weekend drew nearer. Just a day before, the U.S. Navy reportedly downed an Iranian drone in the Strait of Hormuz after it approached the U.S.S. Boxer within 1,000 yards in a “provocative and hostile action.” Iran immediately denied the claims that it had lost one of its drones, releasing footage that it says disproves the claims of the U.S. Navy. The escalating tensions in the Strait of Hormuz have some military analysts fearing that the likelihood of an escalation into armed conflict could accidentally be triggered by a misstep on either side. ç

As “earnings season” continues in the U.S. and more of the nation’s companies make a point of stating that the current strength of the U.S. dollar is hurting their earnings, possibly more so than any impact of tariffs, market expectations continue to suggest that a rate cut by the Federal Reserve at the end of July is now a near certainty. Across the Atlantic, some analysts believe that the European Central Bank may be prepping to undertake its own rate cut in September, having failed to move inflation anywhere near its 2% target.

The Federal Reserve is virtually the only central bank that has moved rates higher since the “Great Recession” forced the world into the uncharted territory of zero, near zero, and amazingly negative interest rates. When the Fed jumps back onto the easing bandwagon, it could lead to a new round of competitive devaluations of the world’s fiat currencies as other central banks move to keep their own currencies competitive.

The Brexit process has been pushed to the back burner by most major media outlets with only small mentions of “the U.K. will have a new Prime Minister soon” spoken mainly as an aside as if it is just a small obstacle to be surmounted. The battle between the U.K. and the rest of the E.U. remains far from a minor problem that is closing in on a viable solution. The search for a new Prime Minister has taken focus off of the fact that Parliament has yet to see a Brexit deal that it would ratify and that the EU refuses to make any further concessions.

The trade war between the U.S. and China has already apparently triggered many suppliers to make early exits, moving their supply chains into Vietnam. Even if the U.S. and China suddenly decide to settle their differences on trade, it is not likely that the decisions that led to shifting those supply chains will be easily reversed, meaning that China’s economy could see further slowdown as it begins to lose jobs out of its economy.

The U.S. Congress is once again embroiled in a standoff over the so-called “debt ceiling”, and fast running out of time in which to solve the impasse. The Congress is due to leave for Summer Recess soon and if the debt ceiling is not increased prior to their departure, then the U.S. could be faced with the likely possibility that it could begin to default on its debts by late August or early September. Treasury Secretary Steven Mnuchin has already warned Congress that his “extraordinary measures” that allow him to pay government bills will not lass through September.

In what seems to be a global economy that is facing more and more uncertainty, both geopolitical and macroeconomic, many investors are increasing their efforts to make sure that their portfolios are diversified away from overexposure to any single class of assets. Many savvy investors continue to accumulate physical precious metals for this purpose, viewing their historical status as a “safe haven” in times of economic turmoil as remaining valid in modern times. These investors continue to accumulate physical precious metals when temporary price dips allow them the 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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