The Precious Metals Week in Review – September 4th, 2020

1. Market volatility continued this week as the U.S. Non-Farm Payrolls Report was released and the pandemic continued to run its course. The partisan bickering between the Democrats and the Republicans escalated as the U.S. Congress failed to return to work on drafting a new compromise coronavirus stimulus package. Protests and outright riots continued throughout major U.S. cities and the violence at many of the “protest” gatherings escalated dramatically. It is likely that demonstrations will continue, especially through the long Labor Day weekend ahead.

2. For the week ending August 29, the seasonally adjusted number of Americans filing initial claims for state unemployment dropped by 130,000 claims from the previous week’s revised level, falling back below 1 million to a new level of 881,000 claims. The previous week’s claims level was revised higher by 5,000 claims. The four-week moving average of claims also dropped back below 1 million this week, falling by 77,500 from the previous week’s revised average to reach a new level of 991,750. The previous week’s moving average was revised higher by 1,250 claims. The Bureau of Labor Statistics reiterated with this week’s unemployment report that the methodology for seasonal adjustment calculation had been revised to reflect additive factors as opposed to multiplicative factors.

3. The Non-Farm Payrolls Report for August was released on Friday and the numbers came in far better than expected. Non-farm payrolls surged by 1.37 million in August, beating expectations for a gain of 1.32 million. The unemployment rate tumbled to 8.4% from July’s 10.2%, which also beat economists’ expectations for the rate to drop to 9.8%. The largest gains were in government hiring, with additional gains coming from the retail, education, and health services sectors. The 8.4% unemployment number is the lowest such figure since the U.S. economy shut down almost entirely in March in an effort to halt the spread of the coronavirus.

4. The Nasdaq was on track for its worst 2-day drop since March 12th in early trading on Friday and the Dow was not far behind in the selloff. The selloff in stocks began on Thursday and technology was one of the hardest-hit sectors. Markets staged a slight recovery late on Friday as analysts and investors alike absorbed the better-than-expected data from the Non-Farm Payrolls Report but still logged their worst week since early June.

5. The U.S. Congress has still not managed to come up with a compromise that would allow it to draft a new rescue package to help combat the ongoing economic devastation resulting from the spread of the novel coronavirus that causes COVID-19. Funding for the U.S. government as a whole is also set to lapse by the end of September if Congress does not pass legislation to address the shortfall. According to Vice President Mike Pence, Congress and the Trump administration have agreed to pass a bill, frequently called a Continuing Resolution, to avoid the looming shutdown without tying governmental funding to other ongoing efforts, such as a new coronavirus relief package. Pence told CNBC’s “Squawk on the Street” program that the agreement would allow Congress to “focus just on another relief bill, and we’re continuing to do that in good faith.” The full Congress will return from its August recess next week and Senate Republicans are reported to be prepared to take up a smaller aid package plan of just $500 billion, which is expected to be vehemently opposed to by the Democrats who have been seeking close to $3 trillion in new aid.

6. Greece and Turkey continued to be at odds over energy resources in the Mediterranean this week. Greek Prime Minister Kyriakos Mitsotakis said this week that NATO-brokered discussions aimed at reducing tension between the two could not be held until Ankara stopped making “threats” to Greece. Turkish Foreign Minister Mevlut Cavusoglu responded, telling reporters in Ankara “Greece showed once more that it’s not in favor of dialogue.” Earlier in the week, NATO chief Jens Stoltenberg said that leaders of the two countries had “agreed to enter into technical talks at NATO to establish mechanisms for military deconfliction to reduce the risk of incidents and accidents.” Greece’s foreign ministry said, “Published information claiming Greece and Turkey have agreed to hold so-called ‘technical talks’ on de-escalating tensions in the eastern Mediterranean do not correspond to reality.” They continued, saying “de-escalation will only take place with the immediate withdrawal of Turkish vessels from the Greek continental shelf.” In Ankara, Cavusoglu said, “Greece denied the secretary general’s [remarks] but the one lying here is not the NATO secretary-general, it’s Greece itself.”

7. Crude oil ended its four-week winning streak after dropping nearly 3% on Friday alone, and 4% for the week overall. The price drop appeared to be primarily driven by the downward moves in equity markets and a report showing that job growth in the U.S. slowed in August after governmental aid packages were exhausted. Brent crude, the international benchmark for oil, settled at $42.66 per barrel while West Texas Intermediate crude moved below $40 to settle at $39.77 per barrel.

8. The euro began the week drifting mostly sideways against the U.S. dollar and then began moving marginally higher early on Monday. The euro touched its highs for the week in early morning trading hours on Tuesday, and then began a steady decline into negative territory that took it near its lows for the week by mid-morning on Thursday. The euro attempted to stage a recovery on Thursday but quickly halted its upside moves and moved sideways into Friday. The euro never regained positive territory and bounced briefly to its lows for the week on Friday. The euro did not stay at its lows for long but closed without regaining positive territory and will end the week lower against the U.S. dollar. The Japanese yen began the week moving immediately lower against the U.S. dollar and that trend continued all the way through late Thursday. The yen touched its lows for the week around mid-day on Thursday before spiking marginally higher. The yen did not maintain its upward momentum and drifted sideways into Friday’s trading, where it dipped briefly back near its lows before bouncing back higher to close out the week slightly to the downside against the U.S. dollar.

Volatility should be expected to continue as the November election in the U.S. draws closer and new coronavirus cases continue to surge across the world. France and Spain both saw massive spikes in their virus case counts this week, potentially representing a precautionary tale for the US as the Fall flu season approaches.

Many economies have still not fully reopened from the shutdowns that were implemented on a near-global scale in March as the virus began running rampant across the world.

Many central banks have continued, or expanded, their loose monetary policies and are being backed up by fiscal support from their corresponding governments who are all flooding money into the system to try to stave off a full-blown economic depression. The sheer amount of money being created out of thin air is unprecedented. Equity markets have surged as this money has flooded the system, but that frantic run to the upside appeared to come to an end this week as stocks began selling off on Thursday.

U.S. Federal Reserve chairman Jerome Powell said this week that the Fed is likely to keep interest rates low for years. Powell, in an interview with NPR after the Non-Farm Payrolls report was released, said “We think that the economy’s going to need low interest rates, which support economic activity, for an extended period of time. It will be measured in years. However long it takes, we’re going to be there. We’re not going to prematurely withdraw the support that we think the economy needs.”

Bankruptcies continue to be a concern as economic shutdowns or slowdowns continue in response to the pandemic. In New York City alone, 34% of hotels are delinquent on their debt and closures have already begun. Hilton announced this week that it would be shutting down its iconic 44 stories Hilton Times Square hotel permanently. This follows right on the heels of Ashford Hospitality, who turned over its recently acquired Embassy Suites in Midtown West to its lender after falling behind on its debt payments. Doug Hercher, managing director and principal at Robert Douglas said “Most hotels are using capital reserves to help cover interest payments in the near term and the vast majority of hotels in New York City have missed debt service coverage tests that will result in cash flow sweeps and will limit the ability, absent lender agreement, to get loan extensions that would normally be automatic. This is the tip of the iceberg.”

A massive cutback in travel, both business and personal, has seen an accompanying cutback in hotel and transportation reservations all over the world. When viewed on a macro scale, considering the numbers of hotels across the world that have seen similar declines in occupancy, New York may indeed be just the “tip of the iceberg” with regards to the future of the travel and leisure industry as a whole. Small businesses around the world have suffered the most during the pandemic and many of them are also on the verge of shutting down.

In the U.S., Congress has failed to act on another round of stimulus packages to benefit small businesses and their employees. The stalemate and gridlock in the U.S. government appear likely to continue as the partisan bickering between Democrats and Republicans grows stronger ahead of the November presidential election. While they bicker amongst themselves, small businesses and the unemployed continue to suffer from massive declines in revenues and incomes.

The U.S. trade deficit jumped to its highest level since 2008 in July as imports hit a record amount. The surge could be an indicator that trade itself could become a drag on U.S. economic growth in the third quarter. Over the last three quarters, a smaller trade deficit actually helped contribute to gross domestic product.

Last, but certainly not least, the U.S. budget deficit is on track to hit a record $3.3 trillion as massive government spending in efforts to fight the coronavirus and attempts to prop up the overall economy has added over $2 trillion. The debt will exceed the U.S.’s annual gross domestic product next year. The $3.3 trillion figure is more than triple 2019’s budget shortfall and twice the levels that were seen at the height of the Great Recession.

Most investors have become blind to these fundamental facts as equity markets have surged higher and higher on nothing more than the promise of more free money, for longer and longer periods, from the world’s central banks. Savvy investors have watched this occurring and wisely taken steps to ensure that their portfolios are diversified away from a massive overexposure to markets that appear to be in a bubble of epic proportions. Many of these investors have chosen to use physical precious metals for the purpose of diversifying their portfolios, recalling their long-storied role as safe havens in times of economic and geopolitical turmoil.

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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