The Precious Metals Week in Review – February 7th, 2020

1. The continued spread of the novel coronavirus outside of China was the top concern for most news outlets this week. The friction between President Trump and the House of Representatives continued to escalate this week, even as his impeachment Trial in the Senate came to its conclusion.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment decreased by 15,000 claims from the previous week’s revised level to hit 202,000 for the week ending February 1. The previous week’s number was revised higher by 1,000 claims. The four-week moving average decreased by 3,000 claims from the previous week’s revised average and stood at 211,750 claims. The previous week’s moving average was revised higher by 250 claims. Unemployment data can be expected to remain volatile as the economic impact of the spread of the coronavirus begins to make its way across the globe.

3. The U.S. Non-Farm Payrolls Report for January was released this week and came in much stronger than expected. The U.S. economy added 225,000 jobs to payrolls in January, far exceeding economists’ expectations for a gain of 158,000. The official unemployment rate did tick higher, climbing to 3.6% but the move appeared to be primarily driven by an uptick in the labor force participation rate – meaning more people joined the ranks of those actively looking for jobs. The labor force participation rate for January was 63.4%, matching its highest level since June of 2013.

4. President Trump conducted his annual State of the Union address Wednesday night in front of a Joint Session of Congress. The speech was marked by petty acts by members of the Democratic Party, most of whom were giggling and talking throughout the speech, sitting on their hands during moments of applause, or scrolling through their smartphones looking bored. House Speaker Nancy Pelosi even made a point of tearing her copy of the President’s speech in half in a highly visible fashion after the President concluded his speech. Pelosi’s petty act of defiance may, in fact, have violated House Rules against the destruction of documents since the signed copy of the President’s speech is required by law to be delivered to the Speaker of the House and is considered an official document.

5. The impeachment trial of President Donald J. Trump came to its expected conclusion this week when the Senate voted on Thursday to acquit the President of both articles of impeachment brought against him by the House of Representatives. Mitt Romney was the only Republican to break party ranks, voting to convict Trump on the Abuse of Power charge but voting against the Obstruction of Congress charge. Now that the shadow of impeachment and his possible removal from office is gone, we can expect President Trump to go on the offensive in his campaign for reelection against his Democratic opponents, many of whom are openly stating that they will try to steer the U.S. into the ill-advised path of socialism if they are elected.

6. Trade negotiations between the U.S. and China remained on the back burner this week as the novel coronavirus continued to spread outside of China, where it originated. U.S. officials continue to make statements that they are confident in China’s ability to both deals with the spreading virus and also meet their obligations to the U.S. under the “Phase One” trade deal that was signed just prior to the discovery of the coronavirus. With the virus seemingly spreading faster and faster and China taking stricter measures to quarantine and attempt to contain it, many are calling into question whether China’s economy will remain robust enough to fund the purchases, both agricultural and in the energy sector, that the Phase One deal calls for in the coming year.

7. The novel coronavirus that began spreading through Wuhan, China in December has now made its way further across the globe. The number of reported cases has been surging over the last week, with many beginning to question whether China is being factual in its reporting of virus statistics. In Japan, roughly 3,700 passengers and crew remain quarantined on a Carnival Princess cruise ship at the port of Yokohama as the ministry of health screens them for exposure. On Friday, 41 new cases of the novel virus were reported amongst the ship’s passengers, making the total number of coronavirus cases discovered on the ship now 61.

8. Li Wenliang, a 34-year old ophthalmologist who was one of the first medical personnel to notice and report that a new virus similar to SARS had appeared in Wuhan, China in December, died from exposure to the virus this week. Wenliang was one of 8 “whistleblowers” who attempted to warn the public and medical staff in the early days of the virus outbreak but were reprimanded by local police for spreading “illegal and false” rumors. His death triggered a wave of unrest among Chinese social media users who are growing increasingly frustrated over the way officials are handling the outbreak of the virus. Some social media posters even went so far as to use the hashtag #IWantFreedomOfSpeech in their posts but government officials quickly censored the posts.

One Weibo user posted, according to a CNBC translation of a screenshot of the post, that “The top searches on Weibo, the news (that you see) is all that they want you to see, lies are also made up by what those at the top want to make up, (I’m) losing confidence in the official media. Freedom of speech doesn’t exist at all.” Other posts said “It’s really just a show, from the beginning of this epidemic till now, it’s all being made up by one lie after [another]” and “I love this country, love the people in this country, the land, lakes, and rivers but I do not love the country’s rulers.”

9. This week marked the first week of the United Kingdom’s independence from the European Union. The two must still hammer out a trade deal that will govern their relationship from here forward and the challenges to making that happen have already begun to crop up. The U.K. has just 11 months to come up with a trade agreement and the EU’s chief negotiator is already saying that will not be nearly enough time to put together a deal anywhere close to what the EU has already agreed upon with Canada. The U.K. remains in its transition period, during which EU laws and rules remain in place across the country, until December 31, 2020. Prime Minister Boris Johnson has repeatedly said he will not ask for an extension to the transition period. Johnson also said on Monday that the U.K. has “made our choice: we want a free trade agreement similar to Canada’s.” That deal took seven years to put together and has still not been fully ratified by European parliaments.

10. Crude oil prices dropped again this week as the spread of the coronavirus both in and outside of China sparked fears that demand for crude could drop significantly as the world takes further steps to attempt to contain the epidemic. Prices were also under pressure as Russia said it would need additional time to consider whether it would commit to further output cuts under the so-called OPEC+ production cut agreement should demand dip as expected due to the spreading virus. China is one of the world’s largest consumers of crude oil and the government shutdowns of factories across the region as officials try to contain the growing spread of the novel coronavirus could mean that a reduction in manufacturing could lead to a matching reduction in demand for crude oil.

11. The euro opened the week with a brief dip to the downside against the U.S. dollar but then began trending downward for the rest of the week. The euro attempted to halt the decline on Wednesday but could not gain positive momentum and resumed its downward slide through Friday. The euro touched its lows for the week on Friday morning and then bounced briefly higher just before the close. The euro will close out the week to the downside against the U.S. dollar. The Japanese yen also trended downward for most of the week against the U.S. dollar. The yen attempted to halt the decline late on Tuesday, briefly reversing course before resuming its downward trend mid-morning on Wednesday. The decline in the yen became shallower later in the week and by Friday morning the yen had reversed the fall once more. Friday’s shallow recovery was not enough to send the yen into positive territory and it too will close out the week to the downside against the U.S. dollar.

The spread of the novel coronavirus across the globe will clearly be the primary focus for news outlets, as well as the largest factor in determining market volatility in the coming weeks and months. China has reportedly begun locking down cities, preventing travel to and from affected areas and quarantining millions of its citizens in efforts to halt the spread of the virus. Factories have been shut down in affected areas except for some of those factories that manufacture much-needed medical supplies that could help combat the spread of the virus.

China’s GDP is already showing signs of stress as the virus spreads, with many analysts saying that economic growth could slow to as little as 2 percent this year in the wake of the epidemic as manufacturing output and consumer spending plummet. In what would normally be one of the most lucrative periods of the year for China, that of the Lunar New Year celebration, consumers are choosing to remain in their homes and hold on to their savings rather than face the threat of exposure to the coronavirus to go shopping for gifts. Even online shopping has been curtailed as consumers minimize their spending on discretionary items in favor of stocking up on supplies for what could be an extended period of virtual confinement in their homes.

The virus has already made its way into other countries of the world and numbers of new cases appear to be surging, according to World Health Organization data. Falling demand in China, both on the consumer level and the manufacturing level could have far-reaching impacts on the rest of the global economy. Many global goods are dependent on components manufactured in China and if the factories that produce those components are shut down, then the goods that make use of those components will see their supplies begin to dwindle.

The spread of the virus has brought to light a severe lack of manufacturing redundancy in the global marketplace. This realization could have a long-term impact on global trade in previously unforeseen ways, even if China is successful in its quest to halt the spread of the virus and get its citizens back to work. The events surrounding the spread of the coronavirus could lead to manufacturers looking to secure alternative locations outside of China to produce their necessary components.

If multiple manufacturers all take steps to create alternative manufacturing facilities outside of China, it could lead to what amounts to an aggravated recession in China’s previously indispensable and virtually unstoppable manufacturing sector. Given China’s role as the second-largest global economy, such a recession could have devastating effects on the global economy.

In Europe, the United Kingdom and the European Union have begun to take steps to try to come up with a trade agreement that will govern their relationship in a post-Brexit world. It is clear that fisheries will be chief among areas of dispute as the U.K. has already stepped up patrols of its fishing fleet in an effort to curtail fishing in its waters by other members of the EU. Already France has had incidents arising from confusion over its fishing rights in waters off of the Channel Islands. The dispute has resulted in the suspension of fishing activities by French vessels until the issue is cleared up. France depends heavily on fish and seafood that primarily originates in U.K. waters, amounting to roughly 30 percent of the sales of its fishermen.

German industrial production fell for the fifth time within the last seven months according to new data released on Friday. Germany has only narrowly missed sliding into a recession twice over the last year and a half and according to the Organization for Economic Cooperation and Development (OECD), the German economy is expected to only grow at 0.4% in 2020 and 0.9% in 2021.

As uncertainty grows over the accuracy of China’s reporting on coronavirus statistics, market volatility can be expected to escalate dramatically. Noted economist Mohamed El-Erian summed up the dangers posed by the coronavirus by telling CNBC this week “For a long time I thought the market sentiment was so strong that we could overcome a mounting list of economic uncertainty. But the coronavirus is different. It is big. It’s going to paralyze China. It’s going to cascade throughout the global economy. Importantly, it cannot be countered by central bank policy. We should pay more attention to this. And we should try and resist our inclination to buy the dip.”

Cautious investors have already begun taking steps to ensure that their portfolios are diversified away from over-exposure to equities, seeking out alternative asset classes that have been underbought or underappreciated over the last few years, such as precious metals. Many investors began acquiring physical precious metals for the purpose of diversifying their portfolios prior to the rally that began in 2019 and these same investors have continued to accumulate product as support for prices has remained strong in recent months. These investors continue to believe in the long-storied and historical view that precious metals tend to outperform equities in times of economic turmoil and geopolitical strife.

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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