The Precious Metals Week in Review – August 9th, 2019

1. Volatility was extreme this week as U.S.-China trade tensions boiled over and global central banks began a “race to the bottom”, cutting their own interest rates right on the heels of last week’s rate cut by the U.S. Federal Reserve.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 8,000 claims from the previous week’s revised level to a new level of 209,000 claims for the week ending August 3. The previous week’s level was revised higher by 2,000 claims. The four-week moving average of claims increased by 250 from the previous week’s revised average to reach a new level of 212,250 claims. The previous week’s moving average of claims was revised higher by 500 claims.

3. Volatility skyrocketed this week in all markets as trade negotiations between the U.S. and China continued to deteriorate. China’s currency, the yuan, went into near freefall against the U.S. dollar until Beijing stepped in to intervene in currency markets and lend it support. Twice this week the People’s Bank of China set the fix for the yuan below 7 per dollar, with Friday’s fix for the yuan being the weakest since April of 2008. The drop below 7, the first time since the financial crisis in 2008, prompted the U.S. Treasury Department to formally designate China as a currency manipulator.

4. On Friday President Trump took to the airwaves again to criticize China, saying that the U.S. is “not going to do business with Huawei…And I really made the decision. It’s much simpler not doing any business with Huawei…That doesn’t mean we won’t agree to something if and when we make a trade deal.” Trump made his announcement after China said that it would be halting the purchases of American agricultural products in a tit-for-tat standoff over the tariffs that President Trump threatened last week to implement on September 1. Trump went on to say further that “We are talking to China; we are not ready to make a deal, but we’ll see what happens…China wants to do something, but I’m not doing anything yet. Twenty-five years of abuse. I’m not ready so fast.”

5. Late Friday afternoon, White House trade advisor Peter Navarro gave a wide-ranging interview on CNBC and said that Beijing apparently plans to devalue its currency to counter any tariffs that might go into effect. Navarro said “They’re going to [devalue the yuan] and we’re going to take strong action against them. Clearly they are manipulating their currency from a trade point of view.”

6. Richard Grenell, the U.S. Ambassador to Germany told German press agency DPA this week that “It is actually offensive to assume that the U.S. taxpayer must continue to pay to have 50,000-plus Americans in Germany, but the Germans get to spend their surplus on domestic programs.” Mr. Grenell seemed to suggest that the U.S. might pull its troops and support staff out of Germany if the country does not meet its 2% of GDP obligation to fund NATO. He too took to Twitter to express his displeasure saying “There are 34,000 U.S. troops in Germany protecting Germans and Europeans. I can tell you this: They [Der Spiegl magazine and its correspondent Roland Nelles] are wrong. Americans don’t understand why Germany isn’t meeting its NATO obligations and helping the West. And they are growing very annoyed by it.” U.S. Ambassador to Poland, Georgette Mosbacher, also took to Twitter and aggravated the situation further, by saying “Poland meets its 2% of GDP spending obligation towards NATO. Germany does not. We would welcome American troops in Germany to come to Poland.”

7. In Europe, the geopolitical and economic picture turned darker as the UK economy posted its worst quarter since 2012 in a surprise contraction. Manufacturing slid 2.3% and month-to-month GDP for June came in at exactly 0, a contraction of 0.2%. If the U.K. economy continues to contract through the end of September then its economy will officially enter a recession, just as it is set to exit the European Union.

8. Elsewhere in Europe, Italy’s government appears to be nearing total collapse as the two-party coalition comprised of the leftist Five Star Movement and the populist Lega party has begun to come unraveled. Matteo Salvini, deputy prime minister and the leader of the Lega party told media outlets Thursday evening “Let’s quickly give the say back to the voters.” The statement would seem to imply that Salvini is calling for snap elections, which could see the Lega party gain tighter control of the government since they are ahead of all other Italian parties in the polls. If Italy goes to elections, it could mean that the new government would not have enough time to pass the 2020 budget before its due date.

9. Extremely late Friday evening, South Korean media reported that North Korea had once again fired two unidentified projectiles off its coast, the second such launch this week and adding to a string of test launches which began in late July. Kim said earlier in the week that the launches were “an occasion to send an adequate warning to the joint military drill now underway by the U.S. and South Korean authorities.” North Korea has been highly critical of these joint military drills for decades and usually ramps up its rhetoric and belligerence when they begin each year.

10. Oil was up and down this week as trade tensions and the specter of a global economic slowdown weighed on demand forecasts. Brent crude was hovering just below $60-per-barrel while West Texas Intermediate (WTI) was solidly in the mid-$50-per-barrel. A drop in European supply inventories and expectations that OPEC might undertake more output cuts offset a report by the International Energy Agency showing that demand growth for oil was at its lowest since the financial crisis began in 2008.

11. The euro surged higher at the start of the week, touching its highs against the U.S. dollar early on Tuesday and then settling in to drift sideways in a narrow band for the rest of the week. The euro will close out the week higher against the U.S. dollar. The Japanese yen spiked higher against the U.S. dollar to start the week, then drifted sideways through Monday’s trading, spiking higher once again as Tuesday began. The yen quickly plunged to its lows for the week on Tuesday but then began a steady attempt to claw its way higher, which continued throughout the rest of the week. The yen touched its highs for the week late Friday afternoon and will close out the week to the upside against the U.S. dollar.

The spiraling U.S.-China trade standoff remains of critical importance to watch. Market volatility seems to increase every time President Trump heads for his Twitter account to criticize the Federal Reserve or to chastise China over its trade practices. The Federal Reserve’s decision to cut rates last week appears to have triggered a “race to the bottom” for other central banks around the globe as they too began cutting rates, immediately sending their native currencies plunging. President Trump seems to now be putting constant pressure on the Fed to devalue the US dollar by continuing to cut rates, but his goal of weakening the dollar will be made that much more difficult as other banks around the globe send their rates into negative territory to keep their own currencies from rising.

North Korea appears to be taking advantage of the global distraction, firing test launches of missiles off of its coast at an ever-increasing pace, claiming it has every right to continue testing its weapons due to the joint military drills that the U.S. and South Korea are once again conducting in the area.

Evidence of a global economic slowdown continues to mount and the ongoing trade disputes are only aggravating the situation. The U.S. is threatening to slap additional tariffs on roughly $300 billion of Chinese goods on September 1 and China has now retaliated by saying it will halt purchases of American agricultural products. America’s farmers, who have been highly supportive of President Trump up to now, appear to be growing weary of watching their profits dwindle as they are forced to take government handouts while they scramble to find other buyers for their suddenly surplus product, now that China is out of the market place.

Food costs in China have begun to climb as the dispute between two of the world’s largest economies drags on. There is also now a very real danger that the ongoing trade war between China and the U.S. is escalating into a full-blown currency war. China allowed its yuan to fall below the psychologically important level of 7 per U.S. dollar twice this week, a level not seen since the early days of the financial crisis that began in 2008.

Morgan Stanley now apparently believes that if the trade war between the U.S. and China continues to escalate that there is a very high likelihood that a recession will arrive within 9 months.

Germany continues to see economic weakness in Europe, and the ongoing drama surrounding Brexit now appears to be dragging down the United Kingdom’s economy as well. In Italy, the collation government appears to be on the brink of collapsing, with the Lega party apparently ready to call for snap elections to try to gain a greater advantage over the other Italian political parties, putting at risk the passing of Italy’s heavily scrutinized budget for 2020. The Lega party is much more likely to embark on a public spending spree than any of the other political parties in Italy, something heavily frowned upon by the European Commission in Brussels.

As geopolitical and macroeconomic concerns escalate, wise investors continue to take steps to make sure that their portfolios are as diversified as possible against overexposure to any single asset class. Many investors have once again turned to physical precious metals for diversification purposes, viewing metals as a historical “safe haven” asset in times of economic turmoil. Many of these same investors have followed a steady plan of accumulating physical precious metals for their portfolios over the last several years, purchasing their product at what they now view to have been a heavy discount when viewed in hindsight.

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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