The Precious Metals Week in Review – November 15th, 2019

1. The ongoing trade dispute between the U.S. and China continues to spark volatility in all markets. The first public hearings in the impeachment inquiry into President Trump’s July 25 phone call with the President of Ukraine got underway this week but equity markets seemed to largely ignore the spectacle and the political uncertainty it could cause, choosing instead to simply shoot higher on nothing more than the tenuous hope that the U.S. and China were “close” to reaching a trade deal.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment surged by 14,000 claims from the previous week’s unrevised level to a new level of 225,000 claims for the week ending November 9. The four-week moving average increased by 1,750 claims from the previous week’s unrevised average and stood at 217,000 claims. We can expect the unemployment data to become volatile over the next couple of months as the holiday shopping season gets underway. Continued slowdowns in the “brick and mortar” retail sector could create significant errors in the traditional “seasonal adjustment” algorithm as struggling retailers may be forced to reduce the number of temporary workers that they would normally hire during the holiday season.

3. Ray Dalio, the founder of Bridgewater Associates which is the world’s largest hedge fund, told CNBC on Thursday at the National Committee on U.S.-China Relations in New York that the dispute between the U.S. and China is much more than just a trade dispute. Dalio said “There is a trade war, there is a technology war, there is a geopolitical war, and there could be capital wars. And how that’s approached is going to determine what our futures are like.” Dalio went on to warn that if the dispute did extend into capital markets that it could ultimately become a challenge to the U.S. dollar’s status as the world’s reserve currency.

4. The phrase “getting close”, which we have heard for most of the many months that the U.S. and China have been in their on-again, off-again trade negotiations seemed to be the sole hope that equity markets clung to this week in order to shoot farther into bubble territory. On Friday, after reports surfaced that the two sides had once again hit a stalemate over the terms of the much-publicized “phase one” trade agreement, National Economic Council director Larry Kudlow gave a news conference where he uttered the well-worn phrase again, sending equity markets back into positive territory. At the Council on Foreign Relations in Washington, Kudlow said “We’re getting close. The mood music is pretty good, and that has not always been so in these things.” Kudlow hedged his “getting close” comment, however, saying “It’s not done yet, but there has been very good progress and the talks have been very constructive.”

5. According to two measurement tools used by the U.S. Federal Reserve, U.S. GDP growth is going to be near negligible for the fourth quarter. The Atlanta Fed’s GDP now predicts that growth will come in at a paltry 0.3% and the New York Fed’s similar indicator is showing a gain of just 0.4% in Q4. The projections seem to jibe with recent lackluster retail sales and what can only be described as modest production growth.

6. According to the Federal Reserve’s latest report on financial stability, conditions in the U.S. remain stable and the system is “resilient” despite stock market prices that are relatively high, compared to earnings, and that corporations, particularly those at the “bottom end” of the credit range continue to run up debt at record paces. The report said “The core of the financial sector appears resilient, with leverage low and funding risk limited relative to the levels of recent decades. Overall, the level of vulnerabilities in the financial system has moved little since [the May report].”

7. The ongoing protests in Hong Kong turned violent once again this week as a police officer shot a 21-year old protestor three times, sending him to the hospital in critical condition. In a separate incident, police said some “rioters” had poured a “flammable liquid” on an unidentified man and set him on fire. That man is also in critical condition at a hospital but police made no mention of arrests in the case. The protests, which have grown from a focused protest against a single proposed piece of legislation regarding extradition into wider and more violent anti-government demonstrations, have been going on for months and Hong Kong leader Carrie Lam said on Monday that the escalating violence has “exceeded the protesters’ demands for democracy” and that any demonstrators should be considered “the people’s enemy”. Fears are growing that Beijing may take the drastic step of sending military troops into Hong Kong in an attempt to control the situation.

8. In Europe, the city of Venice is underwater. The city is undergoing its worst flood in over 50 years, with the historic St. Mark’s Square completely submerged and closed to tourists as rising waters inundated local shops and the ground floors of hotels. Locals resorted to wearing waterproof waders as they strolled through streets that had become literal rivers, rising up to their thighs in some cases.

9. Germany narrowly avoided a technical recession in the third quarter, managing to squeak out a 0.1% growth for its GDP, beating economist’s expectations for a negative 0.1% contraction. The figures could still be revised further, as the downward revisions to the second quarter showed. Q2 growth was downgraded from -0.1% to -0.2%. Claus Vistesen, the chief eurozone economist at Pantheon Macroeconomics, commented on the figures in a research note, saying “No recession, but most definitely a very weak economy. In some sense, this is the ‘worst’ of both worlds for markets. Today’s data confirm that the German economy has now stalled, but the headlines are probably not dire enough to prompt an immediate and aggressive fiscal response from Berlin.”

10. Crude oil seemed to ignore fundamentals again this week, moving higher despite ongoing concerns over continued excess global supply. Oil seemed to take a cue from equity markets, apparently gaining its pricing support from just the mere mention that the U.S. and China were “close” to inking the “Phase One” trade deal. Brent Crude, the international benchmark, settled at $63.31 a barrel while West Texas Intermediate, the U.S. benchmark, settled at $57.72 a barrel.

11. The euro moved briefly higher against the U.S. dollar at the start of trading for the week but had plateaued by mid-day Monday and moved sideways into Tuesday trading. Late Tuesday morning the euro began a downward drift that lasted through mid-day on Thursday when the embattled currency touched its lows for the week. The euro staged a reversal beginning late Thursday, climbing near vertically higher, pausing briefly late Thursday evening and then resumed again on Friday. Just before the close the euro shot higher again and will close out the week higher against the U.S. dollar. The Japanese yen also moved briefly higher against the U.S. dollar at the start of trading for the week but reversed and drifted lower late on Monday. Early Tuesday morning the yen began staging a recovery that lasted through late Thursday when the yen touched its highs for the week. The yen reversed course after touching its highs for the week but drifted only marginally lower through Friday trading. The yen will still close out the week to the upside against the U.S. dollar.

The U.S.-China trade dispute will continue to be the primary factor that moves markets at least until the ink is dry after the alleged “Phase One” deal has been signed. The escalating violence in Hong Kong could still be a factor in derailing those trade relations if Beijing decides that its only remaining course of action to deal with the situation is to send in military troops to quell the ongoing protests. Hong Kong has maintained its “Special Administrative Region” status with the U.S. even after the U.K. relinquished control of the former British colony to China but that designation is entirely dependent on the U.S.’ assessment of the state of autonomy in the region.

If Beijing effectively seizes control of Hong Kong with its troops, the U.S. will likely terminate any ongoing trade talks and will also likely immediately terminate Hong Kong’s special status, which currently allows it to bypass some of the harsher tariffs that are in place on Chinese goods. Business in Hong Kong is already on the decline as the protests drag on and many companies have begun seeking alternatives to their current Hong Kong branch offices in other locations in Asia.

The Democrat-led impeachment inquiry into President Donald Trump got underway in spectacular fashion in the U.S. this week as witnesses gave public testimony over what they think they might have heard on the now-infamous July 25 phone call between Trump and Ukrainian President Volodymyr Zelensky. Thus far, all testimony given has seemed to be hearsay and one Democrat went so far as to say on record that “hearsay was often better than direct evidence”, perhaps giving indication that all the evidence that the Democrats have gathered thus far in their newest quest to force President Trump out of office may be nothing more than hearsay and conjecture. Republicans have classified the hearings as nothing more than a distraction, with President Trump himself calling the proceedings a “witch hunt” and a “sham” when questioned by reporters for his opinion.

The impeachment proceedings have thus far not revealed anything that would seem to directly incriminate Trump’s behavior and may, in fact, be painting the Democratic party in the worst light as details over Senator Joe Biden’s dealings in Ukraine while he was Vice President is revealed. Biden apparently had a direct role in calling for the firing of a Ukrainian special prosecutor who was investigating the Ukraine-based energy company that his own son, Hunter Biden, sat on the board for. The items that come to light in public witness testimony could do significant damage to Joe Biden’s presidential hopes and cause a shift in support to some of the more radical candidates like Senators Elizabeth Warren and Bernie Sanders, both of whom appear to be leaning more and more towards taking the U.S. on a path towards Socialism if they are voted into office.

Elizabeth Warren has made vilifying the wealthy a central pillar of her campaign, proposing a so-called “wealth tax” which would see the wealthy forced to assess the value of their overall wealth each year and pay taxes on it, whether capital gains have been realized on that wealth or not.

In Europe, Germany’s economy narrowly avoided a recession but appears to have stalled out as its manufacturing sector continues to suffer under a contractionary phase.

In the U.K., Brexit Party leader Nigel Farage has said that he will not contest any of the 317 seats that the ruling Conservative Party, led by Prime Minister Boris Johnson, won during the last election. The Brexit Party will instead focus its efforts on gaining some of the seats currently occupied by the opposition Labour Party and other “pro-Remain” parties in the upcoming election on December 12 in the U.K. Farage said at a televised press conference that he was taking the step in order to “prevent the risk of a second Brexit referendum.” Prime Minister Boris Johnson tweeted about Farage’s decision, saying “We welcome Nigel Farage’s recognition that another gridlocked hung Parliament is the greatest threat to getting Brexit done. If we have another hung Parliament it would lead to two more chaotic referendums next year. The Conservatives only need 9 more seats to win a majority and leave by the end of January with a deal. We can then finally move on as a country, and focus on the priorities that matter to you and your family.”

As the political mud-slinging heats up in both the U.S. and the U.K. and stock markets seem to float further into bubble territory in what has now become the longest bull market on record, savvy investors continue to seek out undervalued assets to help diversify their portfolios against the risk of another recession. Many investors continue to accumulate physical precious metals for diversification purposes, using temporary price dips as buying opportunities to acquire more physical products. Precious metals have long been viewed as a “safe haven” asset in times of economic turmoil and many asset managers and investors alike still view physical precious metals as a necessary part of a well-diversified portfolio.

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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