The Precious Metals Week in Review – September 6th, 2019

1. It was a shortened week with the celebration of the Labor Day holiday in the U.S. The primary market drivers remained the U.S.-China trade war and the escalating political crisis in the United Kingdom as they continue to struggle with meeting the upcoming Brexit deadline in October.

2. Hurricane Dorian turned into a complete nightmare for the Bahamas and then took aim at the East coast of the United States. The storm became the second strongest storm on record in the Atlantic basin, reaching Category 5 status before making its first landfall in the Bahamas. The storm parked itself over the Bahamas, wreaking destruction on the Abaco Islands and Grand Bahama, remaining a stationary and strong Category 4 storm for nearly two full days before finally showing signs of weakening slightly and moving off to the Northwest. The storm then took aim on the East coast of the U.S. after moving away from the Bahamas. While Dorian remained offshore from the U.S. for most of the week, it still caused massive flooding all along the East coast due to elevated storm surge levels and torrential rainfall. It will likely be weeks before the true extent of the devastation can be evaluated, and our hearts go out to all of those affected by this dangerous storm.

3. The seasonally adjusted number of Americans filing initial claims for state unemployment increased by 1,000 claims from the previous week’s revised level to a new level of 217,000 claims for the week ending August 31. The previous week’s level was revised higher by 1,000 claims. The four-week moving average rose by 1,500 claims from the previous week’s revised average and stood at 216,250 claims. The previous week’s moving average of claims was revised higher by 250 claims.

4. The Non-Farm Payrolls Report for August was released on Friday and came in weaker than expected. Wall Street analysts were expecting an increase in payrolls of 150,000. The report showed an increase of 130,000, roughly 25,000 of which were temporary census workers added to the payrolls in advance of the 2020 census. The unemployment rate remained steady at 3.7%, as expected, and the July and June payroll figures were both revised lower. Private payroll additions were just 96,000 – the slowest pace of additions since February. The rate of monthly job growth in the U.S. has slowed dramatically from one year ago, adding to fears that the U.S. economy could be in the first stages of sliding back into recession once more.

5. Both China and the U.S. followed through on their threats to increase or introduce new tariffs over the weekend. The U.S. moved first, imposing 15% tariffs on a large variety of Chinese goods, including footwear, smart watches and flat panel TVs, on Sunday. China immediately retaliated, slapping tariffs on U.S. crude oil and other products. Despite the seemingly continual escalation of tension, U.S. and Chinese trade negotiators are still reportedly going to meet later this month or early in October to continue their discussions.

6. the Institute for Supply Management (ISM) announced this week that the U.S. manufacturing Purchasing Managers’ Index dipped to 49.1% in August. The reading is the lowest for the index in over three years and any value below 50% indicates that the U.S. manufacturing sector is contracting. The ongoing trade war between the U.S. and China has been taking a large toll on the manufacturing sector in the U.S. as export orders have significantly declined.

7. The trade war between the U.S. and China is also apparently having follow-on effects throughout the rest of Asia. Reports surfaced this week that some companies in Asia are also beginning to either return home to produce their goods or are moving their factories to other countries in the region to avoid the crippling tariffs that are cutting into their profit margins. A Nomura analyst report of 56 companies showed that roughly 40 Taiwanese companies are now looking to shift their production back home to Taiwan and away from China. The report also showed that Japanese companies are also following suit. Mitsubishi Electric is shifting production of its machine tools bound for the U.S. from China back to Nagoya, Japan. Nomura economists Sonal Varma and Michael Loo said in the report “These trends are consistent with recent export divergence seen within Asia as a result of trade diversion.” The economists noted that U.S.-based companies, such as Dell, have also used the trade dispute as an opportunity to shift production from China, where labor costs have been escalating. The economists also pointed out in their report that “While rising trade tensions and the need to mitigate risk is a key reason for production relocation away from China, some companies also cited cybersecurity risks as a reason.”

8. The United Kingdom now has just 55 days before it is slated to leave the European Union, the so-called “Brexit.” On Wednesday, opposition parties and rebel lawmakers from the Conservative party took control of the lower house of parliament in a move which could force Prime Minister Boris Johnson back to Brussels to ask for yet another extension to the October 31 deadline for Brexit. If opposition remains steadfast against him, Johnson could also be faced with the fact that he has no choice but to resign his post ahead of the deadline. Johnson called for a general election to take place before the EU summit on October 17, but his opponents have apparently all agreed to vote against or abstain in Monday’s vote on whether snap elections should take place. The upper chamber of parliament, the House of Lords, also approved a bill this week which would block a “no-deal” Brexit when the October 31 deadline rolls around. That bill is expected to be signed into law on Monday

9. Crude oil prices were relatively unchanged for the week with Brent crude closing at $61.47 a barrel and West Texas Intermediate (WTI) closing at $56.52. Prices had dipped earlier in the week on continued concerns over the U.S.-China trade dispute but remarks from Fed Chair Jerome Powell at the University of Zurich that the Fed had an obligation “to use our tools to support the economy, and that’s what we’ll continue to do” seemed to lend support to oil prices on Friday. As travel season comes to a close in the U.S. and the trade tensions continue unresolved, crude oil could soon see additional downward pressure on prices on weakening demand.

10. The euro began the week drifting lower against the U.S. dollar but had reached its lows for the week by Tuesday afternoon. After touching its lows, the euro began a fairly steady climb higher that saw it touch its highs for the week late on Thursday evening. The euro peaked on Thursday and then dipped marginally lower, moved mostly sideways through Friday’s trading session and still appears set to close out the week higher against the U.S. dollar. The Japanese yen spiked higher at the start of trading for the week, then drifted in a jagged but mostly sideways pattern against the U.S. dollar through late Tuesday. The yen began a fairly steady decline against the dollar through the rest of the week, which accelerated to the downside on Thursday. The yen touched its lows for the week late Thursday and then moved mostly sideways through Friday’s trading. Despite a brief spike higher on Friday, the yen could not maintain its upward momentum and was soon back near the lows for the week. The yen will close the week out lower against the U.S. dollar.

The U.S.-China trade war remains the key factor to monitor in the coming weeks. Both sides implemented new tariffs over the weekend, escalating the matter further despite reports that negotiators are supposed to meet to continue talks in October. Niall Ferguson, a senior fellow at the Hoover Institution at Stanford University, notes that the U.S. and China – the two largest economies in the world – are “already in the early stages” of a second Cold War. Ferguson, speaking to CNBC at the Ambrosetti Forum in Italy this week, noted that the dispute between the two was no longer solely about trade. Ferguson said “The good news is I don’t think they are destined for a hot war over the South China Sea or anywhere else, but I do think they are in a Cold War. And I don’t think President Trump any longer has the power to turn it off by doing a trade deal – which I think he intends to do at some point between now and next year’s election.”

Ferguson continued, saying “The problem for Trump is that, having started this Cold War with a trade war, he’s no longer in a position to simply turn it off when it suits him because the thing has escalated into other domains.” The market seems ready to jump on the bandwagon every time Trump tweets that negotiations are “going good” or otherwise shows sign of progress in the talks, but a very large divide has grown between the U.S. and China that a simple tweet is not likely to solve.

In the U.K., Prime Minister Boris Johnson’s gamble to try to push through a “no-deal” Brexit appears to have backfired. Johnson’s opposition has seized control of the House of Commons and the House of Lords also appears to be allying against his wishes. The House of Lords drafted a bill which would make a “no-deal” Brexit a near impossibility and is expected to sign it into law on Monday. Johnson had also demanded early snap elections before the EU summit on October 17 and his newly allied opponents in the House of Commons appear set to reject that, also on Monday. The bill passed by the House of Lords would force Johnson to go back to the European Union and ask them for another delay to January 31, 2020, if there is no withdrawal agreement approved by October 19.  Johnson was heard saying he “would rather be dead in a ditch” than ask the EU for another extension.

The Bahamas and the East Coast of North America will likely see their economies impacted for months as they recover from the devastating aftermath of Hurricane Dorian. The Bahamas took the brunt of the impact, feeling the full force of a strong category 4 and 5 storm for two entire days before seeing it weaken and move off to cause further catastrophic flooding and wind damage as a category 2 and 3 storm all along the East Coast of the United States. The impact to both of their economies as a result of the storm will not truly be known for weeks, perhaps even months.

Signs of a global economic slowdown continue to appear as central banks return to their easy money ways. As the tariff war drags on, the U.S. manufacturing sector has slipped into contraction territory. Global Central banks continue their easy money policies and the Federal Reserve seems to be more than willing to take U.S. interest rates near, or into, negative territory right along with them in a move to competitively devalue the U.S. dollar. President Trump continues to taunt the Fed via Twitter, just this morning calling the media into the battle by saying:

I agree with @jimcramer, the Fed should lower rates. They were WAY too early to raise, and Way too late to cut – and big dose quantitative tightening didn’t exactly help either. Where did I find this guy Jerome? Oh well, you can’t win them all!

— Donald J. Trump (@realDonaldTrump) September 6, 2019

The U.S. Non-Farm Payrolls report, commonly called simply the Jobs Report, came in far under expectations, especially when considering that 25,000 of the 130,000 additions to payrolls were temporary workers hired in advance of the 2020 U.S. Census. Unemployment remained steady, but the signs of a slowdown in the U.S. economy, which has long been the primary growth engine during the recovery from the Great Recession, remain. All eyes will now turn to the Federal Reserve to see if they will continue to cut interest rates to keep the U.S. economy running on life support.

Investors continue to seek out alternative assets to equity markets to ensure that their portfolios are sufficiently diversified against a downturn. Many investors have once again turned to precious metals, long viewed as a safe harbor in times of economic turmoil, for the purpose of diversifying their portfolios. Savvy investors continue to seek out buying opportunities in the form of temporary price dips to acquire more physical precious metals for just such purposes.

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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