The Precious Metals Week in Review – September 20th, 2019

1. The ongoing trade dispute between the U.S. and China, uncertainty over the direction of U.S. monetary policy and continued uncertainty over the United Kingdom’s exit from the European Union all remain the primary drivers for market moves in the near term. A clearly sophisticated strike on Saudi Arabian oil facilities over the weekend also acted to send uncertainty and fear into markets.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment jumped by 2,000 claims from the previous week’s revised level to a new level of 208,000 claims for the week ending September 14. The previous week’s level was revised higher by 2,000 claims. The four-week moving average dropped by 750 claims from the previous week’s revised average and stood at 212,250 claims. The previous week’s moving average of claims was revised higher by 500 claims.

3. The Federal Reserve opted to lower interest rates by another 25 basis points this week. The Fed is increasingly divided on the direction they should take U.S. monetary policy. Two regional Fed Presidents voted against the rate cut while a third actually favored an even larger rate cut than what was decided. St. Louis Federal Reserve Bank President James Bullard said in a note that the committee should have cut rates by 50 basis points, adding that the committee could always reverse course and hike rates again if the downside risks he foresees fails to materialize. Bullard said “there are signs that U.S. economic growth is expected to slow in the near horizon. Trade policy uncertainty remains elevated, U.S. manufacturing already appears in recession and many estimates of recession probabilities have risen from low to moderate levels. In my view, lowering the target range by 50 basis points to 1.509%-1.75% would have been a more appropriate action.”

4. President Trump, of course, immediately took to Twitter to rain criticism down upon the Federal Reserve for not cutting rates more than they did. Trump said:

Jay Powell and the Federal Reserve Fail Again. No “guts,” no sense, no vision! A terrible communicator!

— Donald J. Trump (@realDonaldTrump) September 18, 2019

Trump has been pressuring the Fed, and Jay Powell personally, all month to cut rates even further, even calling for the Fed to take rates into negative territory just as other central bankers around the globe have already done. The Fed is fighting back hard against the pressure, trying to maintain its independent status and prove that it will not “play politics” when determining the course of monetary policy.

5. There seemed to be further signs of progress in the ongoing trade dispute between the U.S. and China this week. Mid-level officials have been meeting in Washington, D.C. and discussing trade policy ahead of scheduled formal talks between high-level officials next month. Last week, China listed 16 U.S. products that it would exempt from tariffs, followed by an announcement by President Trump that the U.S. would be delaying the implementation of further tariffs until October 15th. This week, the Office of the U.S. Trade Representative published three documents announcing that more than 400 types of Chinese products would be temporarily exempted from tariffs that the Trump administration imposed last year. Stephen Olson, a research fellow wat the Hinrich Foundation, said in an e-mail to CNBC that “The latest exemptions are a tacit acknowledgement by the US of the damage being done to domestic interests by the imposition of tariffs. The timing however is interesting. It suggests that both sides have determined that further escalations are not desirable right now, so they are trying to create positive atmospherics before the October round of negotiations, in the hopes that those talks will at least forestall any further deterioration.” The exemptions include a wide range of products across three different sets of tariffs currently in place against China.

6. Despite the perceived progress in whatever trade talks have been taking place, markets were rattled late on Friday when reports surfaced that the mid-level Chinese trade officials were cutting their visit short. A delegation from China was supposed to visit some U.S. farms in Montana, but around mid-day, the Montana Farm Bureau announced that the visit had been cancelled and it was reported that the trade delegation would be leaving Washington, D.C. earlier than planned.

7. The Financial Times reported on Friday that U.K. Prime Minister Boris Johnson has said he does not expect to reach a “legally operable” deal over the so-called “Irish Backstop” that has been the major sticking point in the ongoing Brexit negotiation process before a critical meeting among EU leaders on October 17 and 18. The report directly contradicted statements made by Britain’s Brexit Secretary Stephen Barclay. Barclay met with the EU’s top negotiator and said afterwards that “There is a shared desire reflected in the meeting today to secure a deal. There is a clear message from President Juncker and from the Prime Minister that a deal is doable.” Ireland’s deputy prime minister, Simon Coveney, seemed to lean more towards Boris Johnson’s viewpoint however, telling the BBC on Friday “We have a commitment from the British government over and over again – in writing and verbally – that they would work with us to put the issue and the anxiety around the Irish border question to rest now.” He went on to reject the idea that the questions surrounding the Irish border could be sorted out at a later date, post-Brexit.

8. Oil prices were on track for a weekly gain following coordinated strikes against oil facilities in Saudi Arabia that took place over the weekend. The strikes, believed to be backed by Iran and carried out using a combination of drones and cruise missiles, cut oil production in Saudi Arabia in half and cut global oil supplies by roughly 5 percent. The kingdom said that it expects to restore production to full capacity by the end of the month. There is fear among analysts that Saudi Arabia may see increasing efforts to hit them where it hurts the most – their oil fields – and may have trouble keeping their oil fields safe from such attacks in the future. Brent Crude settled at just above $65 a barrel while West Texas Intermediate (WTI) settled at just over $58 a barrel.

9. The euro bounced marginally higher against the U.S. dollar at the start of the trading week but soon dropped slightly lower as it neared Monday. The euro dropped into negative territory late Sunday night and then moved to its lows for the week by late Monday evening. The euro staged a recovery attempt on Tuesday but did not maintain momentum and spent the rest of the week bouncing along essentially sideways. A slight dip lower on Friday will ensure that the euro closes out the week lower against the U.S. dollar. The Japanese yen spiked higher against the U.S. dollar at the start of trading for the week, but then began a slow drift to the downside that saw the yen touch its lows against the dollar for the week late Wednesday evening. The yen spiked back into positive territory on Thursday and then spent the rest of the week also bouncing along sideways. A spike higher near the close of trading on Friday will ensure that the yen closes out the week to the upside against the U.S. dollar.

Tension can be expected to escalate in the Middle East in the near term as Saudi Arabia attempts to sort out exactly who was responsible for the strikes that took out half of their oil production over the weekend. The Yemen-based Houthi rebels claimed initial responsibility for the attack, but the evidence points to the possible involvement of Iran, who has long supported the Houthis. The strikes were initially claimed to be the result of drones, but an examination of the evidence seems to suggest that at least some of the attacks were carried out by highly sophisticated Iranian-made cruise missiles.

President Trump tweeted, after the attack:

Saudi Arabia oil supply was attacked. There is reason to believe that we know the culprit, are locked and loaded depending on verification, but are waiting to hear from the Kingdom as to who they believe was the cause of this attack, and under what terms we would proceed!

— Donald J. Trump (@realDonaldTrump) September 15, 2019

The U.S. released satellite photos of the impacted facilities and said that the damage and nature of the impacts were consistent with an attack coming from the direction of Iran or Iraq, rather than from Yemen, which is to the south. Iraq denied that its territory had been used for such an attack. U.S. Secretary of State Mike Pompeo said over the weekend that Iran had been responsible for the attack, accusing them of “an unprecedented attack on the world’s energy supply.” Iranian officials have denied responsibility for the attack and have warned the U.S. that its military assets in the region are all within range of Iran’s missiles. The head of Iran’s Revolutionary Guards aerospace force, Amirali Hajizadeh, was quoted as saying “Everybody should know that all American bases and their aircraft carriers in a distance of up to 2,000km around Iran are within the range of our missiles.” Iranian foreign minister Javad Zarif said, via Twitter, ”Having failed at ‘max pressure’, [Pompeo] is turning to ‘max deceit’.”

On the U.S.-China trade war front, there appeared to progress as the U.S. showed some signs that it was willing to bend a little on some of its tariffs. The U.S. announced that it would be exempting roughly 400 different types of Chinese items from tariffs that had been imposed by the Trump administration last year. Lower-level officials from China have been in Washington D.C. meeting with their U.S. counterparts ahead of higher-level talks scheduled for next month and equity markets took the exemption announcement as a positive sign that negotiations were making progress.

Their hopes were dashed later on Friday when the delegation from China canceled a planned trip to some of America’s farms in Montana and cut their trip short to return home to China. It was not immediately clear why the delegation decided to cut their trip short, but equity markets immediately had a negative reaction to the news.

The uncertainty over Brexit continued this week as the U.K. appears no closer to reaching a consensus over the so-called “Irish Backstop” portion of the current Brexit deal that has long been the sticking point in the process. The U.K. is still slated to leave the European Union by October 31 whether a deal governing their relationship with the rest of Europe is in place or not. Parliament is still suspended in the U.K. and not slated to return to session until just under two weeks before Brexit is due to take place.

Investors continue to seek out ways to ensure that their portfolios are sufficiently diversified away from overexposure to equity markets that have long been considered in a bubble that is overdue for bursting in what may be an epic meltdown. Savvy investors began a plan of steadily accumulating physical precious metals for diversification purposes, acquiring their product when the temporary price dips allowed them the opportunity to purchase it at a discount. These same investors have kept adding physical precious metals to their portfolios as global uncertainty has grown on both a macroeconomic and geopolitical level. Precious metals have historically been considered a “safe haven” asset to own in times of economic and geopolitical turmoil and many investors have recently returned to this viewpoint again, driving prices up as demand has increased.

Miners have shuttered their most unproductive mines at this point, cutting production output as prices have remained suppressed over the last several years. Miners cannot simply “turn on the spigot” as they frequently do in the oil industry and immediately resume output from these mines. It will take months to bring in the equipment and labor required to resume production at mines that have been closed for years in some cases. This means that if there is a sudden surge in demand for their product, mining companies will not be able to immediately meet the supply.

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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