The Precious Metals Week in Review – June 5th, 2020

1. Geopolitical tensions have surged to the forefront of the news as the U.S. and China become engaged in a growing dispute over how the initial outbreak of the coronavirus was handled. China is facing increasing global criticism over its failure to heed the warnings that were coming from its own medical professionals in Wuhan as the virus emerged. This failure to act early is being blamed for the delay in reacting to, and thus the delay in the containment of, the novel coronavirus that causes COVID-19. The U.S. is also facing growing unrest in its own borders, sparked by the death of George Floyd at the hands of Minneapolis police officers who appeared to use an excessive amount of force while restraining him during a routine arrest.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment was lower again for the week ending May 30, falling by 249,000 claims from the previous week’s revised level to reach 1,877,000 claims. The previous week’s claims level was revised higher by 3,000 claims. The four-week moving average of claims also fell again this week, dropping by 324,750 from the previous week’s revised average to reach a new level of 2,284,000. The previous week’s moving average was revised higher by 750 claims. Volatility in the unemployment data can be expected to remain in the near term as U.S. states begin reopening their economies on a wider scale now that the “curve” for new COVID-19 cases seems to be on the downslope.

3. The U.S. Non-Farm Payrolls Report (NFP) for May was released on Friday and shocked economists and media personalities alike. May saw the largest one-month jobs increase ever posted since reporting began. Payrolls rose by 2.5 million and the “official” unemployment rate dropped to 13.3%. Half of the jobs gained were in the leisure and hospitality industries which were some of the hardest-hit sectors as the world went into one of the largest lockdowns ever seen in response to the spread of COVID-19. Wall Street estimates had been for a payroll drop of 8.3 million and for unemployment to spike to 19.5%.

4. Despite the blowout jobs number, Vice President Mike Pence told CNBC on Friday that the Trump administration will continue its “good faith” discussions with Democrats regarding additional coronavirus relief. Pence told CNBC’s “Squawk on the Street” program that the Trump administration would “work in good faith to put the interests of the American families and American businesses first.” Pence continued, saying “But what’s absolutely essential about any additional recovery package is that we have the kind of pro-growth policies that President Trump has been advancing.” Following the release of the blowout NFP report, there was some speculation that the administration might feel that another round of relief funding may be unnecessary.

5. Mortgage rates in the U.S. spiked following the release of the NFP Report leading one sector analyst to say, “It’s going to be ugly.” Matthew Graham, COO of Mortgage News Daily, continued, saying “Today is the first time since the Covid-19 market reaction settled down in March that interest rates truly have a reason to panic. Until further notice, this looks like liftoff.” Mortgage rates loosely follow the yield on the 10-year Treasury and a sell-off in the bond market that accelerated after the release of the jobs report pushed yields to their highest levels since March.

6. Bankruptcy filings continue among retailers, many of whom were already struggling prior to the outbreak of the pandemic. JC Penney announced that it would be closing 154 stores this summer beginning June 12 and that it would announce additional closures in the coming weeks. Brooks Brothers, which was hard hit when the “work from home” trend led to a sharp decline in the purchase of business attire, is also apparently talking to banks about raising financing for a potential bankruptcy in July.

These large retailers are likely just the tip of the iceberg in what could become a wave of small business bankruptcies in the wake of the pandemic. Despite the return of the service industry, as evidenced in the latest Non-Farm Payrolls Report, many restaurants are still facing government-mandated capacity limitations which are seriously curtailing their ability to turn a profit due to the razor-thin margins that are commonplace in the industry. If these capacity limitations on restaurants continue into the coming months, many of these restaurants could find it unprofitable to remain in business and may make the difficult decision to enter bankruptcy.

7. On Thursday, the European Central Bank announced that it was expanding its emergency program which was first announced in March in response to the spread of COVID-19. The ECB is now expected to keep buying government bonds well into 2021. The ECB expanded its Pandemic Emergency Purchase Program (PEPP) to a total of 1.35 trillion euros ($1.53 trillion U.S.) and extended the duration of the program to June of 2021. Most analysts project that the impact of COVID-19 on global economies will force the ECB into both expanding the scope of purchases and extending the deadline well beyond that June 2021 limit. The ECB also said on Thursday that it expects the eurozone to finish 2020 with an inflation rate of just 0.3%, well below the seemingly global central bank goal of a 2% inflation target.

8. Crude oil surged again this week, climbing more than 5% on Friday after the release of the U.S. Non-Farm Payrolls report and touching a 3-month high ahead of a heavily anticipated OPEC+ meeting over the weekend. Brent crude rose to $42.07 per barrel while West Texas Intermediate crude settled at $39.55 per barrel. OPEC+, the group of leading oil producers that includes original OPEC members plus some additional oil-producing countries, will hold a video conference meeting on Saturday, according to Russia’s energy ministry. Two sources inside OPEC+ said that both Saudi Arabia and Russia had agreed to extend deeper cuts through the end of July or August. The first tropical storm of the season formed in the Gulf of Mexico this week, which also added a boost to oil prices as the already dwindling number of operational U.S. oil rigs was expected to be diminished further by shut-ins ahead of the approaching storm.

9. The euro began the week trending higher against the U.S. dollar. The euro paused its climb around mid-day on Monday, drifting sideways into mid-morning on Tuesday and then resumed its climb through Wednesday evening. The euro drifted slightly lower through late Wednesday and into early Thursday before shooting near vertically higher late Thursday afternoon. The euro touched its highs for the week in early morning trading on Friday and then drifted lower ahead of the close. Despite the drift back to the downside late Friday, the euro will still close out the week higher against the U.S. dollar. The Japanese yen drifted sideways against the U.S. dollar as trading opened for the week before sliding lower on Tuesday around mid-day. The yen bounced slightly higher Wednesday but soon resumed its downward trek. The yen attempted another slight recovery late on Thursday, but quickly returned to its downward trend and will close out the week near its lows against the U.S. dollar.

Civil unrest in the United States, sparked by several high-profile incidents where police actions resulted in the deaths of those they were attempting to arrest or subdue exploded this week. The deaths have led to a swath of protests both in the U.S. and even throughout the world, some of which have turned violent. Rioting, deliberate fires, and looting have occurred in many of the larger urban areas of the U.S. as pent-up anger over the ongoing economic challenges brought about by the spread of COVID-19 seemingly found an outlet.

The chaos at some of the protests has resulted in the destruction of many of the small businesses that were only now beginning to take steps towards reopening after local governments relaxed stay-at-home restrictions that had forced businesses deemed non-essential to close their doors for months as the virus continued to spread. Many of those owners whose business were not destroyed by the initial wave of rioting and looters felt the need to remain closed, placing plywood over their doors and windows due to fears that the growing protests could spark further destruction.

Health officials are concerned that the large scale of the protests taking place around the country could trigger a secondary wave of COVID-19 infections.

The U.S. Non-Farm Payrolls Report for May blew through expectations, showing a remarkable return of over 2.5 million jobs. The reporting period did not cover the outbreak of the civil unrest however and health officials are concerned that if the virus begins spreading more rapidly again as a result of the protests, that those jobs that just recently were regained, could just as easily be lost once more.

Many states have not yet fully moved into the later stages of their plans to reopen their economies and the outbreak of violent protests, combined with another outbreak of COVID-19, could force those that have not yet begun to fully reopen to significantly delay their timelines. Already, many of the larger urban areas in the U.S. have implemented curfews to try to prevent some of the looting and property damage that areas such as New York, Atlanta, Washington D.C., and Los Angeles have already seen. Such curfews are a double blow to businesses such as restaurants who are already fighting to make a profit under orders to limit their capacities.

China has taken full advantage of the chaos in the U.S., using the footage of U.S. police trying to control the violence and looting in their own cities as justification for Beijing’s stance against, and treatment of, protestors in Hong Kong. The relationship between the U.S. and China remains on shaky ground, at best. The U.S. is still banning flights to and from China, a move which is made in the early days of the outbreak and has not yet come to an agreement with Beijing on the resumption of those flights. China has also been largely unable to fulfill its side of the “Phase One” trade agreement that it signed with the U.S. in January due to the restrictions that both sides put into place to attempt to halt the spread of the virus.

Equity markets surged following the release of the latest Non-Farm Payrolls Report, but some analysts are urging investors to proceed with caution, and continue to recommend that investors ensure that their portfolios remain diversified against the possibility of another downward shock in stock markets brought on by escalating tensions with China.

Many investors continue to acquire physical precious metals as part of their plan to diversify, viewing metals as historic hedges against economic uncertainty and inflation. Central banks continue to plunge fiat currencies, that they are all essentially creating out of thin air, into their respective financial systems to combat the economic devastation wrought by the coronavirus pandemic.

Economists are growing increasingly concerned that the world’s central banks might overshoot their 2% inflation targets amid so much economic uncertainty and create conditions that could lead to runaway inflation. Savvy investors continue to watch the precious metals markets for buying opportunities, acquiring additional physical products for their portfolios whenever temporary price dips present them with the opportunity to do so at a discount.

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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