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LAWRIE WILLIAMS: Is nothing sacred nowadays?  Probably not!

China has always been adept at playing the long game, and Russia has been following in its footsteps.  Both nations have used the decades now of détente with the West to put themselves in a dominant position in terms of the supply of certain key metals, minerals, and strategic manufactured items that they virtually have a stranglehold on the supply of many  products that are absolutely key to the economies and national security of potential competitor nations.  In short, these still totalitarian states are taking one of the worst aspects of capitalism and using mass production and low pricing to drive competing businesses out of several key strategic markets.

This has been brought to global notice by the Russian invasion of Ukraine and the reaction of nearly all European nations in condemning it with the imposition of economic sanctions on Russia.  Yet Russia holds virtually all of them economic hostage to the potential threat of cutting off their key energy source – nearly all European nations are enormously dependent on the supply of Russian oil and natural gas through a complex network of overland pipelines.

Russia would obviously like to sow dissent among the Europeans through threats to limit, or cut off, supplies, although the situation is not that simple.  But if an all-out war with NATO were to develop no doubt supplies would be cut immediately.  At the moment Russia needs the revenue from its oil and gas sales to finance its Ukraine war so a somewhat uneasy situation is currently in place as European nations desperately try to source alternate supplies and Russia looks for alternate markets, and the oil and gas continues to flow, with reducing delivery rates probably balanced in revenue terms by rising prices.

As for China it has long cornered the market for a number of absolutely key strategic metals and minerals, and where its domestic mines are not dominant it has sought to buy control of overseas mines which fit this criterion.  For example, of the list of 35 metals and minerals deemed strategically critical by the U.S. , China is the dominant supplier of 21 of these. Most other western nations find themselves in a similar position.

But it is not only the supply of metals and minerals which is a current cause for concern.  China is also a leader in certain aspects of technology, particularly in the communications and computing sphere.  Indeed many U.S. technological products are now manufactured in China and there is a huge fear, possibly unfounded, that U.S. and allied security protocols may have been breached and accessed accordingly.  Hence the recent actions taken against Huawei over its technology and equipment being used in new 5G communications systems, despite denials by the company and the Chinese government.  Who believes government denials nowadays?

So what has all the above got to do with precious metals prices going forward?   Absolutely everything we would suggest.  It presages an era of global economic instability and tensions the like of which we have probably not seen for decades.  Indeed not since the eras which led up to massive global conflicts.  Let us hope and pray that the end game this time around is not something similar.

Such global geopolitical and economic instability, or the contemplation of such, tends to drive wealth into protective assets, and gold is probably the one that has best stood the test of time in this respect.  Forget bitcoin, while some equities may do OK in such conditions but others may be decimated, and the choice between potential winners and losers tends to be a real gamble. 

The worse the situation we find ourselves in the higher these ‘safe haven’ asset prices may rise – so be careful what you wish for.  But we see the potential for the escalation of the war in Europe as decidedly worrying, as is that of China flexing its military muscles over Taiwan, particularly if the latter’s principal ally, the U.S., also becomes embroiled in a European conflict.  Can its military fight successfully concurrent conflicts on opposite sides of the world simultaneously?

Hopefully all the above possibilities will remain theoretical only.  But the very fact that they are even in the mind’s eye may well provide a continuing stimulus to the global gold price and drive it to new heights,  But as long as no real actual military escalation occurs, price rises should remain under reasonable control and still continue to disappoint the out-and-out gold mega-bulls.

25 Jul 2022 | Categories: Gold, China, Russia, US, Bitcoin, inflation

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