The Precious Metals Week in Review – September 13th, 2019

1. Primary market drivers remain the ongoing trade war between China and the United States and the continued chaos surrounding the United Kingdom’s alleged and upcoming exit from the European Union. All eyes will be on the Federal Reserve next week as they hold their Federal Open Market Committee (FOMC) meeting to determine the course of U.S. monetary policy.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment plunged by 15,000 claims from the previous week’s revised level to a new level of 204,000 claims for the week ending September 7. The previous week’s level was revised higher by 2,000 claims. The four-week moving average dropped by 4,250 claims from the previous week’s revised average and stood at 212,500 claims. The previous week’s moving average of claims was revised higher by 500 claims.

3. The Federal Reserve will be under extensive scrutiny next week as it meets under extraordinarily divisive conditions. President Trump has continued his public criticism of the Federal Reserve via Twitter, even going so far as to call Chairman Jerome Powell naïve and the entire Fed body “boneheads” this week. In his now customary Twitter rant, Trump said “The Federal Reserve should get our interest rates down to ZERO, or less, and we should then start to refinance our debt. INTEREST COST COULD BE BROUGHT WAY DOWN, while at the same time substantially lengthening the term. We have the great currency, power, and balance sheet. The USA should always be paying the lowest rate. No Inflation! It is only the naïveté of Jay Powell and the Federal Reserve that doesn’t allow us to do what other countries are already doing. A once in a lifetime opportunity that we are missing because of ‘Boneheads.’” The Fed is widely expected to lower interest rates by at least another quarter-point at its FOMC meeting next week.

4. President Trump’s suggestion that the U.S. should refinance its debt was met with shock and scorn by economists and analysts alike. Mark Zandi, chief economist at Moody’s Analytics said “It’s not viable and could be a significant problem for investors, financial markets and ultimately the economy. The debt is not pre-payable. There’s a contractual relationship the Treasury has with investors. This isn’t a mortgage; this is U.S. Treasury debt. I think it would be incredibly disruptive to financial markets, and interest rates would ultimately rise, not fall.”

5. A Wall Street report released by AB Bernstein this week observed that the total U.S. debt, including all forms of government, state, local, financial and entitlement liabilities, is running well over 1,000% of GDP. The exact number their calculation arrived at was 1,832% of GDP and the observation comes just as the amount of outstanding U.S. federal debt has skyrocketed to $22.5 trillion. A recession arriving at these debt levels would likely be devastating, resulting in massive debt defaults at all levels.

6. There seemed to be some progress in the ongoing trade dispute between the U.S. and China this week. President Trump tweeted on Wednesday “At the request of the Vice Premier of China, Liu He, and due to the fact that the People’s Republic of China will be celebrating their 70th Anniversary on October 1st, we have agreed, as a gesture of good will, to move the increased Tariffs on 250 Billion Dollars worth of goods (25% to 30%), from October 1st to October 15th.”

7. Treasury Secretary Steven Mnuchin gave an interview from the White House this week, telling CNBC that President Trump could “do a deal at any time. But he only wants to do a good deal.” Mnuchin addressed the President’s delay on the October tariff increases, saying “The president delayed it because of a request from the vice-premier. The optics of us raising the tariffs on October 1st, which is their 70th anniversary, caused them grave concern on the symbolism.” Earlier in the week, China announced it would be exempting 16 American products from additional tariffs, including food for livestock, cancer drugs and lubricants. The Ministry of Finance posted two lists on its web sites of items that would be exempt from further tariffs as of September 17. The site also said that refunds would be issued on some of the listed items for tariffs that had already been collected.

8. The European Central Bank slashed interest rates by 10 basis points this week, sending them to negative 0.5%. The ECB also restarted its bond buying program known as quantitative easing (QE). The central bank did not put an end date on its QE program but capped purchases at 20 billion euros per month. The bank also committed to keeping its interest rates at their present levels, or lower, until inflation levels “robustly converge to a level sufficiently close to but below 2% within its projection horizon, and such convergence has been persistent.” At a press conference following the decision, ECB President Mario Draghi said “In view of the weakening economic outlook and the continued prominence of downside risk, governments with fiscal space should act in an effective and timely manner. In countries where public debt is high, governments need to pursue prudent policies that will create the conditions for automatic stabilizers to operate freely. All countries should reinforce their efforts to achieve a more growth-friendly composition of public finances.” This will be Mario Draghi’s last policy decision as the head of the ECB. Incoming President-elect Christine Lagarde will be at the helm when the ECB meets next.

9. U.K. Prime Minister Boris Johnson is reportedly going to meet the head of the European Union’s executive arm, Jean-Claude Juncker, for a “working lunch” on Monday in Luxembourg. This will be the first time the two have met since Johnson took office last month, but it is unlikely that much will come from the meeting. Michel Barnier, the chief negotiator for the EU in the long and embattled Brexit talks, said “We will see in the coming weeks if the British are able to make concrete proposals in writing that are legally operational.” Finland’s Prime Minister, Antti Rinne, says a no-deal Brexit is looking more and more likely. Rinne said, discussing a phone call that he had with Mr. Johnson “some weeks ago”, that he had “made very clear to him [Boris Johnson] that there is no possibility to get a new deal.”

10. Oil prices were on track to see a weekly loss as slowing global growth offset any perceived headway in the U.S.-China trade talks. Jim Ritterbusch, president of Ritterbusch and Associates said in a research note that “Oil appears to be suggesting that global economic growth has already been impacted by the tariffs while other markets such as the equities appear more focused on future progress.” Both OPEC and the International Energy agency said that the world could once again end up with a surplus of oil next year despite efforts by OPEC and other non-member countries to limit production. Brent Crude was just over $60 a barrel while U.S. West Texas Intermediate was hovering around the mid-$50 a barrel range.

11. The euro bounced higher against the U.S. dollar at the start of the trading week, but quickly dipped slightly lower than the opening levels. The euro moved essentially sideways for nearly the entire week until late Thursday when the euro experienced a near vertical drop to hit its low for the week. The euro did not stay at its lows long, seeing another vertical spike higher almost immediately that took it back near its opening level for the week once more. The euro edged higher through Friday trading and appears set to close out the week marginally higher against the U.S. dollar. The Japanese yen dipped lower at the start of trading, then jumped back to its opening levels almost immediately. The yen spent the rest of the week drifting lazily lower against the U.S. dollar except for a brief spike higher on Thursday. The yen resumed its drift to the downside, touching its lows for the week on Friday morning. The yen made a move to the upside late in the day on Friday, but dipped lower again and will close out the week to the downside against the U.S. dollar.

The U.S.-China trade negotiations remain at the top of the list of items of concern for markets. There appeared to be a slight de-escalation of tensions between the two sides this week as first China announced it would be offering exemptions to tariffs for some U.S. products, even offering refunds for some tariffs that have already been collected. President Trump tweeted later in the week that he had agreed to a request by Vice Premier Liu He to hold off, “as a gesture of goodwill”, on raising tariffs on October 1st due to the observation of People’s Republic of China’s 70th anniversary on that date. Stock markets seemed to take these two events as a near certainty that the negotiations are making progress and immediately shot back to record highs once more.

As experts were quick to point out, we are “only a tweet away from a resolution or escalation.” Such were the words of Fitch Ratings’ James McCormack, the global head of sovereign ratings. Mr. McCormack told CNBC’s Squawk Box on Thursday that “Things change very quickly, it’s hard to know what motivation there is – to be honest – on the U.S. side. So, I wouldn’t want to read too much into a small concession suggesting that we’re on the road to this being resolved. I think there’s a couple more chapters yet to be written in the trade war.” Iris Pang, the greater China economist at Dutch-based bank ING, said in a note on Wednesday that Beijing had been considering the exemption of the items it listed this week since May and that the move was aimed more at supporting China’s own economy and less of a “gesture of sincerity towards the U.S.” Pang continued, saying “There are still many uncertainties in the coming trade talks. An exemption list of just 16 items will not change China’s stance. We believe that China will stand very firm in the negotiations, which will be similar to the last round of talks.”  Officials from both countries are slated to meet in early October to continue talks on how to resolve their trade dispute.

In Europe, the chaos surrounding Brexit continues as the U.K. parliament was suspended this week and will not meet for the next five weeks. The shutdown, known as prorogation, will mean that lawmakers in the U.K. will not reconvene until October 14, just 17 days before the October 31 deadline for the U.K. to either come up with a viable Brexit agreement or leave the European Union in a disorderly fashion.

A Scottish court ruled the shutdown unlawful, setting up for a legal showdown in the coming weeks as the decision heads to the Supreme Court in the U.K. A three-panel judge said that Mr. Johnson’s action “was motivated by the improper purpose of stymieing Parliament and that it, and what has followed from it, is unlawful.” In response, the U.K. government said “U.K. government needs to bring forward a strong domestic legislative agenda. Proroguing Parliament is the legal and necessary way of delivering this.” Scotland has its own separate legal system from the rest of the U.K., but the Supreme Court in London has the power to overrule its decisions. Global yields continued their plunge into negative territory this week as the European Central Bank cut rates by 10 basis points, sending them to negative 0.5 percent. The central bank also rebooted its Quantitative Easing program, capping bond purchases at 20 billion euros per month. The bank also noted that there is no planned end date for the latest round of QE. As rates continue their global decline, investors continue to look for other asset classes that can protect their hard-earned cash in a negative yielding environment.

Many investors have returned to the view that precious metals can offer a “safe haven” during times of economic turmoil. The anti-gold mantra for years now has been “it offers no yield”. As yields dip deeper into negative territory the phrase “no yield is better than negative yield” is suddenly coming into vogue among media analysts. Many savvy investors began a plan of accumulating physical precious metals for the purpose of diversifying their investment portfolios, years ago when prices for precious metals were under heavy pressure as stock prices soared. When buying opportunities in the form of temporary price dips presented themselves over the last several years, these investors used those dips as an opportunity to acquire more physical product for their portfolios at a relative discount. The recent surge in prices for precious metals has shown these investors the wisdom of steadily accumulating product without trying to “time the market.”

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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