The Precious Metals Week in Review – July 26th, 2019

1. The U.S. appears set to kick the proverbial can down the road once more as the House passed a two-year deal to increase the debt ceiling yet again, sending it to the Senate for a vote.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 10,000 from the previous week’s unrevised level to a new level of 206,000 claims for the week ending July 20. The four-week moving average of claims decreased by 5,750 from the previous week’s unrevised average to reach a new level of 213,000 claims.

3. President Trump apparently convened a meeting between several key Cabinet members and top-level economic advisors this week to discuss ways to weaken the U.S. dollar. According to top economic advisor Larry Kudlow, Trump opted not to intervene in U.S. currency markets after the meeting on Tuesday. Two officials who declined to be named, but were present at the meeting, told CNBC that some of the ideas that were discussed were implementing capital controls and having Treasury Secretary Steven Mnuchin and Larry Kudlow “jawbone” the dollar, talking it lower in various television appearances. The meeting apparently ended without a clear decision on a formal policy for weakening the dollar. Larry Kudlow appeared to deflect all questions directed at him regarding deliberate weakening of the dollar, telling CNBC later in the week that “What the president is concerned about is foreign countries may be manipulating their own currencies lower to try to gain some short-term temporary trade advantage. That we do not like, but it’s not a question of bringing down the dollar.”

4. The House of Representatives passed a bill that would suspend the so-called “debt ceiling” for the U.S. and set budgetary spending levels for the next two years. The legislation now moves to the Senate for review and is expected to pass there within the next few days and be sent to the President’s desk for signature into law. Most House Republicans are against the bill, calling it “deeply flawed” and said that Congress should instead “hammer out a budget agreement that responsibly cuts spending and sets the country on a track to fiscal solvency.” Republicans opposed the bill by a 132 to 65 margin while Democrats, who currently have control of the House, voted for the bill by a margin of 219 to 16.

5. Trade talks between the U.S. and China appear to be basically going nowhere. Larry Kudlow, director of the National Economic Council, said on Friday “I wouldn’t expect any grand deal. Talking to our negotiators, I think they’re going to reset the stage and hopefully go back to where the talks left off last May.” A trade delegation from the U.S. is supposed to fly to China Monday for further negotiations with Chinese officials. This will be the first official round of face-to-face trade talks since President Trump and Chinese President Xi Jinping agreed that negotiations would resume on the sidelines of the G-20 summit in Japan last month.

6. The U.S. announced this week that it will take retaliatory action against France in response to the country’s new “digital tax” that appear to mainly target American technology companies. On Friday, President Trump tweeted :

France just put a digital tax on our great American technology companies. If anybody taxes them, it should be their home Country, the USA. We will announce a substantial reciprocal action on Macron’s foolishness shortly. I’ve always said American wine is better than French wine!

— Donald J. Trump (@realDonaldTrump) July 26, 2019

A probe is under way to determine if the new tax is truly discriminatory or unreasonably targets U.S. firms. If either is found to be true, some experts believe that Trump could respond with a tariff of up to 100% on French wine.

7. U.S. Gross Domestic Product (GDP) rose by 2.1% in the second quarter, which was down a percentage point from the first quarter, but better than Wall Street analysts had expected. Tariffs and the slowing global economy were the primary drags on economic growth, but an uptick in consumer spending helped offset those issues. President Trump took to Twitter immediately, using the report as ammunition to once again criticize the Federal Reserve’s current interest rates. Trump tweeted:

Q2 GDP Up 2.1% Not bad considering we have the very heavy weight of the Federal Reserve anchor wrapped around our neck. Almost no inflation. USA is set to Zoom!

— Donald J. Trump (@realDonaldTrump) July 26, 2019

Economic advisor Larry Kudlow, who has had quite the busy week, appeared on CNBC’s Squawk on the Street to back the President’s comments up, saying “I think it’s almost a miracle that the economy is growing as rapidly as it is. This has not been easy with seven rate hikes.” The Federal Reserve concludes its next FOMC meeting on Wednesday, July 31 and is widely expected to cut interest rates by at least 25 basis points, due mainly to the perceived slowdown in the global economy.

8. Firebrand Boris Johnson was announced as the U.K.’s next Prime Minister this week increasing expectations that the country will be leaving the European Union regardless of whether it has a “Brexit” deal in place to govern its relationship with the EU after its departure. He has pledge that he will return to Brussels and attempt to get new concessions despite repeated refusals on the part of Brussels to renegotiate the existing draft Brexit deal with his predecessor Theresa May.

9. Oil prices held their ground this week, boosted by better-than-expected economic data out of the U.S. and growing concerns over the safety of oil transportation through the Strait of Hormuz due to growing tensions in the Middle East. Brent crude was on track for a 1.3% gain for the week after falling 6% last week and West Texas Intermediate (WTI) was on track for a meager 0.5% gain after it fell over 7% last week. Concerns over a slowdown in the global economy, particularly in Asia and Europe, still acted to keep prices in check as concerns that demand may still weaken in the near term remained.

10. The euro saw a brief spike at the start of trading this week, but quickly returned to its opening levels and then began a steady downward trend that lasted all the way through Thursday. On Thursday the euro took a sharper spike lower, touching its lows for the week and then immediately reversed the decline. The euro traded mostly sideways from its lows into Friday and will finish the week out lower against the U.S. dollar. The Japanese yen drifted lower against the U.S. dollar for much of the week in a shallow pattern. On Thursday, the yen turned sharply lower and moved to its lows for the week. The yen traded sideways from its lows through Friday trading and will also finish the week out lower against the U.S. dollar.

All eyes are on the Federal Reserve as we begin to close out the month. Economic data for the second quarter, while not spectacular, still came in better than economists had expected. Prior to the release of Q2 GDP data most analysts have been projecting a rate cut of at least 25 basis points at the conclusion of the Federal Open Market Committee meeting next week.  The Fed will announce its decision on Wednesday and Chair Jerome Powell should also be giving a news conference as usual.

Fears over the ongoing global economic slowdown will likely offset any perceived progress in the U.S. economy, which could lead the Fed to contemplate cutting rates even more than the expected quarter point. Stocks have been surging eagerly higher on expectations that a Fed rate cut will mean a new glut of cheap and easy money once more. The fact that stocks continue to surge ever higher into their bubble on what would otherwise be seen as bad news due to stagnating inflation and dwindling economic growth would seem to suggest that the Fed is the only thing propping up the equities markets and fundamentals no longer seem to apply.

The European Central Bank appeared to be preparing European markets for more monetary easing this week, triggering a drop in the euro to a two-year low against the U.S. dollar. The bank updated wording on its previous statements, saying that it expected key interest rates to remain “at their present or lower levels” at least through Q2 of 2020. ECB President Mario Draghi said at a press conference following the ECB’s monetary policy meeting this week that “a significant degree of monetary stimulus continues to be necessary to ensure that financial conditions remain very favorable and support the euro area expansion.” Other ideas floated by the ECB to attempt to stimulate the economy were apparently lowering charges that banks pay for storing excess cash with the ECB and looking at kicking off further quantitative easing programs in the coming months.

President Trump stressed this week that he feels the U.S. dollar is “too strong” but held off on directly intervening to try to weaken it, favoring allowing Steven Mnuchin and Larry Kudlow to continue to “talk down” the dollar while he continues to pressure the Federal Reserve to cut interest rates to allow the dollar to be more competitive with global central banks that have continued their financial crisis-era stimulus measures due to stalled economies and stubbornly low inflation.

In the U.K., Boris Johnson was announced as the next Prime Minister which immediately sent the odds of a so-called “hard Brexit” higher. The opposition Labour party has been sliding in recent polls, which could lead more moderate Conservative members of parliament to swing back to voting for “no-deal” to protect their parliamentary seats from the Brexit party which has been steadily gaining in polls, in the event that snap elections must be called. Johnson has also been gathering hardliner Brexit supporters to himself ahead of his appointment, and if he stocks his new Cabinet full of these supporters it would almost certainly reinforce his position.

In the Middle East, tensions remain elevated surrounding the safety of oil transport ships in the Strait of Hormuz. Iran refused to release a British-flagged oil tanker that it seized last week though it did grant consular access to the 18 crew members of the vessel to India, where the crewmen hail from. Denmark is apparently entertaining a British proposal for a European-led naval mission into the Gulf to ensure safer transport through the world’s most important oil route. The U.S. is also apparently working on its own multinational security initiative with the aim of protecting international shipping in the region.

As stocks seemingly go higher on every release of weak economic data, cautious investors have been taking steps to ensure that their investment portfolios are sufficiently diversified to avoid overexposure to the overheated equities markets. Physical precious metals are one such diversification technique that many investors have chosen to use, acquiring additional physical product as temporary price dips and long-running price suppression have presented them with the buying opportunity to do so.

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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