The Precious Metals Week in Review – July 17th, 2020

1. Virus cases across the so-called Sun Belt of the U.S. continue to escalate. California has essentially made the decision to shut its economy down once more, and Texas and Florida may not be far behind them in making the same choice. Market volatility can be expected to remain extreme while increasing numbers of new virus cases continue to make headlines.

2. The seasonally adjusted number of Americans filing initial claims for state unemployment dropped only marginally this week, falling by just 10,000 claims from the previous week’s revised level to reach 1,300,000 claims. The previous week’s claims level was revised lower by 4,000 claims. The four-week moving average of claims continued to fall this week as well, dropping by 60,000 from the previous week’s revised average to reach a new level of 1,375,000. The previous week’s moving average was revised lower by 2,250 claims. Volatility in the unemployment data should be expected to continue into the Fall as new virus case counts rise.

3. Retail sales in the U.S. jumped by a better-than-expected 7.5% in June, following on the 18.2% jump that occurred in May. The gains in May mark the largest positive move in the metric since the government started tracking sales in 1992. Expectations were for a more modest increase in sales of 5.2%. The resurgence in virus cases could put retail sales back in jeopardy of falling again as pressure mounts on states to shut down their economies once more in response to a near exponential growth in virus cases in southern and western states of the U.S.

4. The U.S. monthly budget deficit set an all-time record high of $864 billion in June as dwindling tax revenues could not keep up with spending and stimulus programs aimed at battling the economic damage caused by the pandemic. The previous monthly record for the deficit was set in April, just after the U.S. had shut its economy down to try to slow the spread of the virus. The budget year began on October 1 and during the first nine months, the total deficit has climbed to a staggering $2.74 trillion, another record number. The Congressional Budget Office projects that the budget deficit could reach $3.7 trillion by the end of the budget year, which would more than double the annual record of $1.4 trillion that was reached in 2009 at the height of the “Great Recession”.

5. Economists are beginning to warn that the rise in new coronavirus infections could result in a “w-shaped recovery”. In its July World Flash report, IHS Markit noted that while there is evidence of a clear rebound in economic activity in May and June as the spread of the virus appeared to be slowing, the massive surge in new cases in the U.S., Brazil, and India have driven consumers to be cautious with their spending habits once more. The report notes that “Unless fiscal and monetary authorities provide more stimulus, a key support for the recovery will disappear soon.” The report went on to say “The new wave of infections has reduced the probability of a V-shaped cycle, something to which IHS Markit did not subscribe, and increased the risk of a double-dip recession (W-shaped cycle).” The report concludes that “The likely timing of a second downturn would be late this year or early 2021, and the economic contraction would probably not be anywhere near as severe as the recession we just went through.”

6. China’s financial regulator warned that commercial banks there could see a large spike in bad loans due to flagging economic growth. Banks in China have remained relatively stable throughout the crisis, but a surge in bad loans could put a serious dent in their profit margins. The International Monetary Fund is projecting that China’s economic growth, which came in at 6.1% last year, could slow to as little as 1% as a result of the pandemic, which originated within its own borders. The China Banking and Insurance Regulatory Commission noted this weekend that some of China’s banks have not yet put aside enough capital to cover any potential losses due to these bad loans and that could cost the industry as much as 350 billion yuan ($50.08 billion). The regulator noted that “Small and medium-sized financial institutions remain much more vulnerable than large, state-owned commercial banks with nationwide franchises and will likely bear the brunt of the eventual reckoning.” China is also home to an extensive and heavily obscured “shadow banking” system, which the regulator does not govern. This system is likely also heavily overburdened by bad loans and so the looming problem may actually be much worse than regulators fear.

7. The U.K. economy continued to falter in May despite the easing of government restrictions that were put in place to attempt to slow the spread of the pandemic. Economists had projected that the U.K. economy could rebound by as much as 5.5% in May, but the official data showed an expansion of just 1.8%. The Office for National Statistics said in its release that despite the expansion “the level of output did not recover from the record falls seen in March and April 2020 and has reduced by 24.5% compared with February 2020, before the full impact of the coronavirus.”

8. The U.S. Congress appears to be pondering yet another coronavirus relief bill as virus cases continue to set records across the U.S. President Trump said this week that he will not sign the next package into law if it does not include a payroll tax cut for workers. He may face pressure from both parties, Democrat and Republican, to drop that requirement as the benefits of such a cut would largely go to aid those that have managed to remain employed throughout the crisis and not bring additional aid to the millions that have found themselves on the unemployment line as their employers have been forced to shut down operations.

9. Hong Kong is reportedly telling Taiwanese officials there that they cannot have their visas renewed unless they sign a document supporting Beijing’s “one China” policy. Taipei has been heavily critical of the new security law that China is now enforcing in Hong Kong. China continues to maintain that Taiwan is nothing more than a rogue province that needs to be brought under control with the same “one country, two systems” arrangement that Beijing supposedly agreed to with Hong Kong. Beijing has been steadily chipping away at the framework of its agreement with Hong Kong ever since. There are no formal diplomatic relations between Taiwan and China, so Hong Kong has served as the bridge for trade and investment between the two. If the Taiwanese officials hold out and refuse to sign the “one China” document, it could mean further deterioration in the already tense relationship between China and Taiwan and be a dramatic blow to Taiwanese trade.

10. Crude oil prices remained remarkably stable this week given the continued surge in coronavirus cases around the world. Many analysts are projecting that fuel demand could drop again as consumers hole back up in their homes under renewed travel restrictions and efforts to stop the ongoing spread of the virus. Brent crude settled at $43.13 per barrel for the week and West Texas Intermediate crude settled at $40.59 per barrel. OPEC announced this week that it had agreed with its allies to reduce the ongoing production caps by 2 million barrels per day beginning in August, which would bring more production back online just as demand may be dropping again due to renewed concerns over the pandemic.

11. The euro began the trading week climbing higher against the U.S. dollar. The battered currency dipped briefly around mid-day on Monday, quickly jumped higher, but had begun drifting lower as Tuesday trading began. Tuesday morning the euro began surging higher and went on to touch its highs for the week around mid-day on Wednesday. The euro began drifting to the downside late on Wednesday, pausing to spike briefly higher late Thursday, but quickly dropped back and resumed its downward drift into Friday trading. The euro surged back to its highs for the week on Friday and appears set to close out the week near its highs and to the upside against the U.S. dollar. The Japanese yen drifted lower against the U.S. dollar for the first part of the week, reversing course on Tuesday and beginning a move that sent it back into positive territory by Wednesday. The yen touched its highs for the week around mid-day on Wednesday and began a jagged drift to the downside that saw it back near its lows for the week by late Thursday night. The yen reversed course again late Thursday and began a relatively steady upward move that nearly took it back to opening levels by the time the market closed on Friday. The yen closed out the week slightly to the downside against the U.S. dollar.

The ongoing surge in coronavirus cases continues to cause increased volatility in all markets as governments begin pondering a resumption of dramatic restrictions in efforts to further combat the virus that has already done so much damage to the globally connected economy. Central banks and governments continue pumping money into the financial system in efforts to counteract both skyrocketing unemployment across the world, and a growing flood of business bankruptcies, small and large alike.

Cases continue growing in Asia and the Americas while Europe seems to be leveling off. The U.S. set multiple daily case count records this week and South America and India are both seeing massive surges in cases as well. India has mandated another two weeks’ worth of lockdowns in many sections of the country as its case count nears one million. Brazil has already passed the 2 million case count, but the World Health Organization has now concluded that its cases are no longer escalating at an exponential rate.

China continues taking steps to strongarm Hong Kong and Taiwan into submission, straining its relationship with the rest of the world and the U.S., in particular. After passing a new national security law for Hong Kong that will blatantly allow Beijing to suppress democratic freedoms in that city-state, reports surfaced this week that Taiwanese officials in Hong Kong have been told that they cannot have their visas renewed until they sign a document saying that they support China’s “one China, two systems” policies. Taiwan continues to maintain that it should remain independent of China while Beijing views the tiny island as nothing more than a renegade province that rightfully belongs to China.

China has also been flexing its naval muscle in the South China sea in recent months as the rest of the world was distracted by dealing with the pandemic that shows very little signs of slowing down. Many observers fear that China is trying to spread its influence into hotly disputed areas of the South China Sea where many Asian nations have competing claims with China.

In Europe, the fact that over half of the year is now gone – also meaning that nearly half of the U.K.’s allotted time to negotiate the terms of its exit from the European Union is also gone – seems to have gotten lost in the mass coordinated efforts to combat the coronavirus. Prime Minister Boris Johnson continues to adamantly state that the U.K. will not ask for an extension to the 11-month transition period that began on January 31, 2020, when it officially exited the EU. Negotiators for the EU maintain that there is not enough time left to come up with an agreement governing the relationship between the two that will be satisfactory to both sides. Johnson himself contracted the coronavirus and was hospitalized for much of the earlier part of the year and unable to participate in the negotiation process. As we move into the latter half of the year, Boris Johnson may face greater and greater pressure to cave in and ask the EU for an extension.

As the world descends into further uncertainty amid a resurgence of coronavirus cases, investors appear to increasingly be turning to precious metals as a means to help diversify their portfolios against another potential crash in equity markets. Precious metals have long been viewed as safe havens in times of geopolitical and economic turmoil and today’s global environment appears to be reinforcing that viewpoint.

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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