The Precious Metals Week in Review – August 2nd, 2019

1. The Federal Reserve’s interest rate decision was set up to be the primary driver for market moves this week until President Trump announced further tariffs on China on Thursday. Friday’s Non-Farm Payrolls report also added to market jitters as it seemed to reinforce the idea that the Fed could place further rate cuts in a holding pattern.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 8,000 claims from the previous week’s revised level to a new level of 215,000 claims for the week ending July 27. The previous week’s level was revised higher by 1,000 claims. The four-week moving average of claims decreased by 1,750 from the previous week’s revised average to reach a new level of 211,500 claims. The previous week’s moving average of claims was revised higher by 250 claims.

3. The Federal Reserve held its Federal Open Market Committee meeting this week to determine the course of monetary policy and decided that the time is now appropriate to conduct an interest rate cut for the first time in a decade. The Fed cut interest rates by 25 basis points in spite of ongoing commentary that the U.S. economy appears to be performing well. Markets had put odds at 100 percent that the Fed would undertake a rate cut, but Chair Jerome Powell’s comments following the meeting’s conclusion seemed to take markets by surprise. Powell appeared to be taking a less “dovish” stance than markets expected, hinting that the Fed was not embarking on a new and steady series of rate cuts and would remain patient and “data dependent” when considering its future interest rate decisions. Stock markets, hoping for a new era of cheap and easy money as interest rates go lower, clearly did not like his tone.

4. Friday’s Non-Farm Payrolls report for July was mostly in-line with expectations as far as the addition of 164,000 jobs to the U.S. economy. Economists had expected the addition of 165,000 jobs. Wage growth came in at a better-than-expected 3.2%, year-over-year and the total labor force set an all-time high record of 163.4 million. An influx of 370,000 new workers into the labor force led to the unemployment rate remaining steady at 3.7% instead of dropping further as economists had expected.

5. The Senate passed the two-year budget deal that the House of Representatives sent for review last week, clearing the way for the legislation to be signed into law by President Trump. The deal suspends the so-called “debt ceiling” for the U.S. over the next two years, eliminating the threat that the U.S. could begin to default on its debts, while boosting spending, particularly for the military, at the same time. Ahead of the successful 67-28 Senate vote, President Trump tweeted “Budget Deal is phenomenal for our Great Military, our Vets, and Jobs, Jobs, Jobs! Two year deal gets us past the Election. Go for it Republicans, there is always plenty of time to CUT!” The bill was the Senate’s last piece of legislation before leaving Washington, D.C. for summer recess, the House of Representatives having already adjourned to begin its recess last week after it passed the bill and sent it to the Senate.

6. President Trump appeared to confirm this week that the trade talks between the U.S. and China are, in fact, still going nowhere. On Thursday, following directly on the heels of the Fed’s decision to cut interest rates, Trump sent out a chain of tweets saying “Our representatives have just returned from China where they had constructive talks having to do with a future Trade Deal. We thought we had a deal with China three months ago, but sadly, China decided to re-negotiate the deal prior to signing. More recently, China agreed to buy agricultural product from the U.S. in large quantities, but did not do so. Additionally, my friend President Xi said that he would stop the sale of Fentanyl to the United States – this never happened, and many Americans continue to die! Trade talks are continuing, and during the talks the U.S. will start, on September 1st, putting a small additional Tariff of 10% on the remaining 300 Billion Dollars of goods and products coming from China into our Country. This does not include the 250 Billon Dollars already Tariffed at 25%. We look forward to continuing our positive dialogue with China on a comprehensive Trade Deal, and feel that the future between our two countries will be a very bright one!”

7. China’s foreign ministry responded to President Trump’s latest threat to institute more tariffs on Friday. Hua Chunying, spokesperson for China’s foreign ministry, said at a daily press briefing that Beijing would have to take countermeasures if the U.S. follows through with its threat of new tariffs. She also added, according to Reuters, that while China did not want a trade war with the U.S., it was not afraid of fighting one. The foreign ministry also reportedly criticized the U.S., saying that “the world’s largest economy should give up its illusions, shoulder some responsibility and come back to the right track on resolving the trade war.”

8. North Korea fired off a series of missile tests into the sea off its coast this week, launching two short-range ballistic missiles on Wednesday and two additional projectiles on Friday. The tests come on the heels of another test of two unidentified projectiles that took place last week. President Trump was asked about Wednesday’s incident during a press conference on Thursday and downplayed the issue, saying “These are short-range missiles – we never discussed that. We discussed nuclear. A lot of other countries test that kind of missile.” Trump’s dismissal of the multiple tests may embolden North Korea’s belligerent leader, Kim Jong Un, to conduct further short-range tests or perhaps even resume conducting long-range tests once more.

9. President Trump’s surprise announcement of additional tariffs on Chinese goods beginning September 1st sent crude oil reeling, experiencing its largest daily drop in multiple years. Oil prices managed to recoup some of the losses on Friday but were still down for the week. Brent crude was sitting in the low $60-a-barrel range while West Texas Intermediate (WTI) was solidly in the mid-$50-a-barrel range. The oil market did see some price support from a drawdown in U.S. inventories, though concerns over a slowdown in global demand for oil as trade tensions escalate continue to weigh prices down.

10. The euro drifted slightly lower at the start of trading this week and then gradually, but steadily, began drifting higher against the U.S. dollar. Late on Wednesday, the euro saw a dramatic plunge to the downside that saw the battered currency touch its lows for the week by mid-afternoon on Thursday. The euro reversed course late Thursday and began an attempt at a recovery, clawing its way back near opening levels for the week, but still appears set to close out the week to the downside against the U.S. dollar. The Japanese yen drifted mostly sideways for the entire week but began a near vertical move to the upside that continued through Friday’s trading. The yen appears set to close out the week slightly to the upside against the U.S. dollar.

The trade dispute between the U.S. and China has resumed the top spot among market worries once more now that the Federal Reserve’s interest rate decision is behind us. President Trump announced this week that he would be placing 10% tariffs on an additional $300 billion worth of Chinese goods coming into the U.S. beginning on September 1st, despite supposed progress in trade talks between the two countries. Trump claims the tariffs are needed due to a failure on China’s part to uphold its end of a verbal agreement between himself and China’s President Xi Jinping on the sidelines of the G20 summit that took place in Osaka, Japan earlier this year. Trump claims that China had promised to step up its purchases of U.S.-based agricultural products and to also stop the illegal sales of the powerful drug Fentanyl into the U.S. while the trade talks continue and that, to date, China has failed to do either. China’s response to Trump’s announcement of additional tariffs was to warn the U.S. that it would be forced to take retaliatory measures if the new tariffs go into effect and to say that the U.S. should “shoulder some responsibility and come back to the right track on resolving the trade war.”

North Korea appears to be taking advantage of the escalating dispute between China and the U.S. to resurrect its weapons testing programs, firing multiple short-range ballistic projectiles into the sea off its coast this week. President Trump’s cursory “those are short-range missiles – we didn’t discuss that” remark when a reporter asked him about the incidents on Thursday will likely only embolden Kim Jong Un to take steps to conduct additional tests. Trump, in a flurry of tweets as markets closed on Friday of this week, continued to stoke fear and worries over the U.S.’ trade relations among its global partners, saying he could increase the tariffs on China to “a much higher number” and seemingly threatening the European Union that “auto tariffs are never off the table.” The uncertainty over the state of global trade sent stock markets tumbling, with the S&P 500 turning in its worst weekly performance so far in 2019.

Gold, which had dipped following the Federal Reserve’s announcement that it was cutting interest rates by 25% but was not necessarily embarking on a new round of consecutive rate cuts, had recovered its losses by late Friday on the growing uncertainties surrounding the state of global trade. Stock analysts are starting to expect a coming market correction in what has been a traditionally weak time of year. Further potential rate cuts by the Federal Reserve likely won’t take place until at least September, well after President Trump’s September 1 deadline on establishing new tariffs on Chinese goods. With Congress on summer recess, the ongoing trade issues, and the long delay until the next Fed meeting, Julian Emanuel, head of equity and derivative strategy at BTIG notes: “The real issue as to why there’s going to be a correction in our view is there’s a massive, massive vacuum here. In essence, it’s a month and a half of a vacuum, if you think about the direction of the rhetoric. The issues are China, the issues are the Fed and the issues are Brexit.”

In Europe, the signs that the U.K. will exit the European Union in a disorderly fashion appear to be growing. The U.K. has an October 31 deadline to come up with a viable exit plan and if it fails to do so, the EU will essentially kick it out in what has come to be called a “hard Brexit”. The reshuffling of the leadership at the International Monetary Fund, the European Central Bank, and the government of the U.K. could all lead to further uncertainty in Europe as well.

As global uncertainty continues to escalate, investors continue to seek out ways to ensure that their portfolios are diversified against overexposure to any single asset class. Many analysts feel that precious metals remain undervalued when compared to stocks and that they may represent one such means of diversifying a portfolio away from overexposure to equity markets. Those investors who continued to accumulate and hold physical precious metals for diversification purposes while stocks soared ever higher into bubble territory over the last several years have seen their strategy begin to succeed as fears over a coming correction in stocks grow. Physical precious metals, long despised by the mainstream media as stocks soared, have suddenly begun to be discussed as a “safe haven” play once more as their prices finally show signs of a rally once more.

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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