The Precious Metals Week in Review – December 27th, 2019

1. It was a shortened trading week due to the timing of the Christmas holiday period this year. The impeachment of Donald J. Trump was pushed to the back burner as Congress left Washington, D.C. for its Christmas break and media outlets began their usual year-end reviews of the markets. Next week will also be a shortened trading week as we close out 2019 and begin a new decade.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 13,000 claims from the previous week’s revised level to 222,000 for the week ending December 21. The previous week’s data was revised higher by 1,000 claims. The four-week moving average increased by 2,250 claims from the previous week’s revised average and stood at 228,000 claims. The previous week’s moving average was revised higher by 250 claims. We can continue to expect the unemployment data to remain volatile as we close out 2019 and move into the New Year.
3. House Speaker Nancy Pelosi failed to send the articles of impeachment to the Senate before Congress left Washington, D.C. for Christmas break, as was widely expected. The antics of the House of Representatives as they continue their quest to impeach Donald J. Trump have been nothing short of extraordinary. The House Judiciary Committee announced Monday that it was still trying to subpoena former White House counsel Don McGahn and that it could draft additional articles of impeachment against Trump if further evidence is revealed during his testimony if they can force his appearance. The moves made by the House, and Speaker Nancy Pelosi in particular, have clearly angered President Trump, who spent some of his Christmas Holiday leveling criticism via Twitter about the entire process. Trump said:

…& overwhelming,” but this Scam Impeachment was neither. Also, very unfair with no Due Process, proper representation, or witnesses. Now Pelosi is demanding everything the Republicans weren’t allowed to have in the House. Dems want to run majority Republican Senate. Hypocrites!

— Donald J. Trump (@realDonaldTrump) December 26, 2019

If Nancy Pelosi continues to sit on the current articles of impeachment, the U.S. government will enter uncharted waters. If no trial occurs in the Senate, which cannot happen until the House forwards the articles of impeachment, the President cannot be removed from office. Legal experts are already wrangling over whether or not the President can actually be considered to have been impeached if Pelosi fails to send the articles, arguing that her own failure to follow the impeachment process to completion may actually invalidate the very thing that the House went to great lengths to draft and adopt.

4. U.S. economic growth in the third quarter remained unrevised at just 2.1% according to official data released by the U.S. Commerce Department this week. The reading was still somewhat expansionary, coming in 0.1% higher than the April to June reading of 2%. Despite the lack of a revision to the originally estimated GDP number, consumer spending appeared to have been stronger than previously reported and is expected to have continued to be strong through the holiday season. Growth slowed from the 3.1% reported in the first three months of 2019, primarily due to the ongoing trade dispute between the U.S. and China.

5. A United Nations-mandated ban on weapons sales to Iran expires in October of 2020 and Russia has already apparently ruled out an extension to the agreement. Deputy Foreign Minister Sergei Ryabkov told the Interfax news agency in an interview that was published on Friday “We’re [Russia] not ready to do the bidding of our American colleagues.” The expiration on the ban of weapons sales to Iran was part of the 2015 multi-lateral nuclear deal with Iran – a deal that the U.S. withdrew from last year. Iran is already apparently making a list of offensive weapons it wishes to acquire including fighter jets, submarines and air-defense systems from both Russia and China.

6. In China, corporate bond defaults surged to a record high in 2019 and local governments, already saddled with a massive debt of their own, are increasingly choosing to forego additional bailouts and are simply letting these businesses fail. Defaults on Chinese corporate bonds have shot past $23 billion, or 160 billion yuan, blowing through last year’s record of 120 billion yuan. Rowena Change, an associate director at Fitch ratings company, said in a report earlier this month that “Reduced funding access for weaker shadow banks could result in increased credit events and defaults, particularly against the backdrop of a slower environment, which can be particularly acute for private-sector enterprises.” The so-called “shadow banking” sector in China has long been targeted as a high risk to China’s economy due to the unregulated nature of its lending activities. Roughly two out of every five loans in China are made by the shadow banking sector, according to unofficial reports.

7. North Korea is widely expected to conduct some sort of weapons test before the end of the year. The belligerent nation said in early December that it would “surprise Washington with a Christmas present” but has thus far been silent on the weapons front. Harry Kazianis, senior director at the think tank Center for National Interest based in Washington, D.C., said “I hope I’m wrong…I think the North Koreans are going to test an intercontinental ballistic missile (ICBM).” Kazianis said he expects such a test to be similar to the ICBM test the North conducted in 2017. Kazianis went further, saying “If they really want to sort of drive the point home that they can put the United States at risk of a nuclear weapon, they would actually put a dummy warhead at the end of it and show that that warhead can get through the atmosphere and hit something like a city.” Tensions between North Korea and the U.S. have been on the rise again, with Kim Jong Un ramping up the rhetoric against President Donald Trump in recent months amid stalled talks.

8. A dip in U.S. inventories saw crude oil move to near three-month highs this week despite a thin trading environment due to the holidays. U.S. crude stockpiles fell by 5.5 million barrels in the week ending December 20 according to a report released by the Energy Information Administration. The expected decline in inventories was just 1.7-million barrels, according to a Reuters poll of energy analysts. Brent crude was trading at $68.11 per barrel while West Texas Intermediate maintained its level above $60, trading at $61.70.

9. The euro had an odd week in the shortened trading session over the Christmas holiday. The embattled currency spent most of the week trading nearly sideways against the U.S. dollar until trading reopened early Thursday. As Thursday opened in Europe, the euro spiked to its highs for the week, surging in a near-vertical spike. The surge was brief, and the euro quickly returned to its previous levels, resuming its sideways motion until Friday trading began. The euro began a steady climb to the upside on Friday that appears set to see the currency close out the week higher against the U.S. dollar. The Japanese yen also had an odd trading week, similarly moving sideways against the U.S. dollar through Christmas, but spiking lower after trading reopened on Thursday. The move in the yen was also short-lived and it quickly surged back to touch its highs for the week before settling back into slightly negative territory. The yen could not gain positive momentum to finish out the week and looks set to close just slightly lower against the U.S. dollar for the week.

As we approach the close of the decade that has come to be labeled “the 2010’s”, markets all appear to be setting up to end the year on optimistic notes, particular given continued perceived progress in the U.S.-China trade dispute.

Stocks have continued to surge into record-high territories amid the apparent easing of global trade tensions and stock analysts have switched away from saying that markets are overdue for a correction and have begun uttering the ever-dangerous mantra that “it’s different this time!” Economist Mohamed El-Erian, the chief economic advisor at Allianz, believes that the progress in the U.S.-China trade fight is overblown and that it is not, in fact, different this time. El-Erian gave a wide-ranging interview to CNBC last Monday and said: “I think past November, we’re going to be back in a trade war, with the risk of it escalating into an ‘investment war’ and a ‘currency war’.” El-Erian called the current “Phase One” agreement between the two sides “a truce” but says “Those who extrapolate this to mean a long, durable, comprehensive trade deal are wrong. The most likely next step is further tensions. All we’re getting here is in both side’s interest to just have a truce for the short term.” China may have cause to agree to continued trade talks however, given the surge in corporate debt defaults that occurred in 2019.

As the trade war has dragged on, tariffs implemented by both sides have begun to take their toll on private companies in China and the U.S., as well as the agriculture industry. The continued rise of the shadow banking sector in China also likely means that the official figures on Corporate debt defaults may be wildly inaccurate and understated. The shadow banking system is largely unregulated, making data collection all the more difficult.

In Europe, Brexit will be the key focus for news outlets as it now appears highly likely that U.K. Prime Minister Boris Johnson’s latest Brexit agreement will pass the U.K. Parliament and move on to the European Parliament where it will also likely pass. Despite the fact that the U.K. will not officially exit the EU until January 31, the clock is already ticking on its transition period, which will expire in December of 2020. Under the terms of the latest Brexit agreement, the U.K. will spend the transition period hammering out a free trade agreement with the EU as well as agreements on law enforcement and data sharing and security. Boris Johnson has already said he will not seek an extension to the transition period, so if no trade deal or other agreements are in place by December 2020 then the U.K. will effectively have taken the “no-deal” Brexit route and would likely be forced to endure checks and tariffs on every good that it sends into the EU.

As the year comes to a close with a seeming atmosphere of “irrational exuberance”, as former Fed Chair Alan Greenspan once said, wise investors continue to take steps to try to ensure that their portfolios remain diversified against a sudden collapse in equity markets. Many investors have continued to acquire physical precious metals as part of their portfolio diversification plans, accumulating more product whenever temporary price dips afford them the opportunity to do so at a discount.

Precious metals have historically been viewed as a safe haven store of wealth in times of economic turmoil and as the time between official recessions stretches further, the odds of a so-called “black swan” event seemingly increase.

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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