The Precious Metals Week in Review – August 16th, 2019

1. Volatility remained extreme this week as the trade battle between the U.S. and China continued unabated. Global bond yields extended their plunge this week as well, increasing the downward pressure on equity markets.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment surged by 9,000 claims from the previous week’s revised level to a new level of 220,000 claims for the week ending August 10. The previous week’s level was revised higher by 2,000 claims. The four-week moving average of claims increased by 1,000 from the previous week’s revised average to reach a new level of 213,750 claims. The previous week’s moving average of claims was revised higher by 500 claims.

3. Equity markets continued to swing wildly this week as tense trade negotiations between the U.S. and China continued to pressure markets. President Trump continues to aggravate the situation via Twitter and on-air comments that generally heap heavy criticism on the talks. Trump did announce this week that he will be delaying some tariffs on Chinese goods until December and removing some items from the targeted list of goods completely, including Apple products which are primarily assembled in China. The announcement was generally viewed as a positive sign for the negotiations.

4. Despite what appeared to be an easing of the U.S.’ hardline stance by backing off on some of the threatened September 1 tariffs, the U.S. Department of Commerce placed China’s General Nuclear Power Group (CGNPG), the largest state-owned nuclear company, to its “entity list” this week. The surprise move essentially blocks any American firm from selling its products to CGNPG. The Department of Commerce said the move to place CGNPG on its “entity list” was driven by the fact that the company had “engaged in or enabled efforts to acquire advanced U.S. nuclear technology and material for diversion to military uses in China.” The English language state-owned newspaper China Daily published an editorial calling the move “an excuse” and extensively criticized the motives of the U.S. The editorial went on to say “The real aim is to try to thwart the country’s ‘Made in China 2025’ initiative that seeks to let Chinese manufacturing move up the value chain, and thus contain its growth.”

5. The ongoing protests in Hong Kong have become the latest source of tension between the U.S. and China and are likely now hampering the ongoing trade negotiations. Trump has directly mentioned the protests in public comments and called for a “personal meeting” with Chinese President Xi Jinping to discuss them. A spokesman for China’s Foreign Ministry claimed this week that “The U.S. denied on many occasions its involvement in the ongoing violent incidents in Hong Kong. However, the comments from those members of the U.S. Congress [House Speaker Nancy Pelosi and Senate Majority Leader Mitch McConnell] have provided the world with new and powerful evidence on the country’s involvement.” Foreign Ministry Spokesperson Hua Chunying continued, saying “By neglecting and distorting the truth, they whitewashed violent crimes as a struggle for human rights and freedom, and deliberately misinterpreted the work of Hong Kong police as violent repression when the police were only enforcing the law, fighting crimes and upholding social order.”

6. Stocks plunged this week as bond yields around the world continued dropping near, or deeper into, negative territory. Media pundits took to the airwaves to explain what a yield curve inversion was to the general public as the U.S. 10-year Treasury note dropped below the rate of the U.S. 2-year note. The 10-year to 2-year yield curve inversion has been a solid and reliable indicator of an impending economic recession for decades, yet the mainstream media seems to have taken up the old “this time it’s different” mantra, quickly dismissing the signal once the inversion reversed itself later in the week.

7. North Korea once again fired two more missiles into the sea off its coast this week. This is the sixth round of test launches of short-range projectiles since late July for the isolated country. It is widely believed that Kim Jong Un is conducting these test launches as a form of protest against the U.S./South Korea joint military exercises which have been underway for the last few weeks. Kim may be trying to make a point to President Trump, hoping to draw him back to the negotiation table by showing that he still has some military cards to play.

8. Italy’s deputy Prime Minister, Matteo Salvini, called for a vote of no confidence in its current coalition government this week. The full Senate will convene on Tuesday to set a timetable for the vote, having been recalled from its summer break since Parliamentary leaders could not agree on Monday for a timetable to debate the motion. A successful vote would trigger snap elections to elect a new government just as the deadline for Italy to begin preparing its 2020 budget draws near.

9. Crude oil plunged along with the equity markets this week as recession fears took hold amid sinking global bond yields. OPEC trimmed its forecast for global oil demand, citing slowing economic growth through the rest of 2019. Despite the initial drop, Oil prices followed equities higher later in the week as the yield curve for U.S. 10 and 2 year Treasuries reversed their inverted state. Prices were still experiencing downward pressure by market close on Friday, however. Brent crude was just over $58-per-barrel while West Texas Intermediate (WTI) was hovering near the mid-$50-per-barrel.

10. The euro spiked higher against the U.S. dollar as trading opened for the week, but quickly returned down to its opening levels and then drifted mostly sideways through early Tuesday morning. The euro began a slight, but steady, drift to the downside late Tuesday and will close out the week lower against the U.S. dollar. The Japanese yen drifted higher against the U.S. dollar as trading opened for the week but saw a near vertical drop late on Tuesday that sent it to its lows for the week. The yen staged a recovery, clawing its way back near opening levels, but soon began drifting lower again and will finish the week out slightly to the downside against the U.S. dollar.

U.S.-China trade tensions remain of top concern to markets in the near term, but negative and low-yielding bonds are fast moving up the list of major concerns for the global economy. Central banks, including the U.S. Federal Reserve, are all out of “ammunition” to kick start their economies. The Fed still has some room for rate cuts, but even they have very little ammunition left. Some analysts have even gone on record to note that the Fed too may decide to take rates negative in the U.S., matching the moves of other global central banks and penalizing savers in an effort to push money out of savings accounts and back into the U.S. economy.

Germany has already taken rates negative but continues to struggle with a slowing economy. Germany has long been the primary economic engine for most of Europe and it has been turning in weaker and weaker economic data each month.

A prolonged global economic slowdown could see the world’s central banks turning to currency manipulation as a last resort as their other monetary policies fail to lift their economies. In such an environment, central banks could embark on a race to the bottom, each manipulating their currencies lower and lower in an attempt to boost their economies by making exports cheaper.

Italy’s government appears headed for a vote of no confidence which, if successful, could trigger a round of snap elections to elect a new government just as the country begins to prepare its budget for 2020. The Lega party, which favors increasing public spending and is apparently ahead in the polls, could benefit from such a move and gain further power, likely putting a newly bloated 2020 budget directly in the crosshairs of the European Commission (EC) in Brussels. Italy stoked the ire of the EC last year when it submitted its 2019 budget so any potential increase in public debt is sure to trigger further backlash.

The ongoing protests in Hong Kong which began over a proposed piece of legislation that would allow extradition from Hong Kong to mainland China has escalated into further violence. The protests have also sparked further disagreement between China and Western countries who fear that Beijing may soon step in to directly quell the protests with its People’s Liberation Army.

Thus far local police in Hong Kong have handled the clashes but such confrontations have been heavily criticized in Western media. If China does take the drastic step of sending its armed troops in to quell the protests in Hong Kong then the trade negotiations between them and the U.S. will almost certainly fall apart. The U.S. would likely be forced to suspend the special consideration that it has long given Hong Kong with regards to its exports and also take some sort of official stance against China in the dispute. Such action could also likely spill over into the relations between Taiwan and the U.S. as China considers Taiwan to be nothing more than a rogue province that has not yet been brought under control and views the U.S.’ consideration otherwise with disdain.

Elsewhere in the region, North Korea has once again fired missiles off of its coast into the sea in protest of the joint military exercises between the U.S. and South Korea. The rogue nation has stepped up its weapons testing since late July, likely in an attempt to force President Trump to pay attention to them again.

As recession indicators begin to flash faster and geopolitical events further escalate, wise investors have continued to take steps to diversify their portfolios to prevent downturns in a single asset class from wiping out their hard-earned gains. Many investors have once again turned to physical precious metals for the purposes of diversification, rejoining the ranks of their peers who chose a path of steadily adding precious metals to their portfolios while prices were still low, rather than waiting to come late to the party after metals had already rallied significantly.

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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