LAWRIE WILLIAMS: U.S./China trade war escalation drives gold to $1,500

In the aftermath of the recent G20 meeting in Osaka markets breathed a sigh of relief as it looked like U.S.-China trade talks were about to get under way again in earnest.  But it looks like no progress was made – as we feared at the time – and President Trump is an impatient man!  Almost out of the blue he announced additional tariffs on Chinese goods to start next month if no agreement is reached.  As a result the dollar/yuan currency parity broke above the psychologically important 7 level without the Chinese Central Bank apparently doing anything to arrest the fall – but then if it did would this also be classified as ‘manipulation’!

A falling yuan exchange rate with the dollar will negate some of the effects of the Trump tariffs which incensed the U.S. President even more and he subsequently labelled the Chinese currency manipulators while the latter upped the ante even more by saying they would not buy American agricultural-related products.  Trade wars have consequences which tend not necessarily to be entirely to the benefit of the principal aggressor – in this case the U.S.

While on the face of things an American trade war with China might look to be a win-win situation for the former given China imports hugely less American goods than the U.S. does Chinese ones, thus tit-for-tat  tariff impositions would seem that they would be heavily to the benefit of the U.S., things are never that simple.  Some of what the U.S. imports from China is of enormous strategic importance – China is the world’s leading producer of a number of key metals and minerals, including heavy rare earths.

A recent U.S. Commerce Department report identified 35 metals and minerals as critical to U.S. national security and the nation relies on imports for no less than 29 of these. This list of key metals and minerals is dominated by China, as the principal supplier.  The U.S. has zero domestic production for 14 of these metals and minerals.  Many of these imports are relied on by the tech sector and. particularly importantly for the U.S., for high-tech weaponry for the defence sector and thus of great strategic significance.  Thus a trade war is not necessarily one-sided despite the overt apparent monetary value advantage to one side or the other.  The U.S./China ‘trade war’ may well escalate further with an intransigent U.S. President on the one side versus a country hierarchy where ‘saving face’ can be a key element in political and economic decisions.  China has not so far gone down the route of restricting exports of strategic metal and minerals to the U.S. but the threat is there should trade tensions escalate further.

So what has all this meant for precious metals?  Gold, and to a lesser extent silver, has been a huge beneficiary, hitting over $1.490 this morning and seemingly inexorably heading towards $1,500 (some observers say it already hit that level a few times in overnight trade) – way higher than the level predicted by most serious analysts for the end of the year back in January.  Uncertainty is good for gold and a seemingly ever-escalating trade and tariff war between the world’s two biggest economies certainly creates this.  We certainly wouldn’t be too surprised for it to rise further from here – it might even get close to its all-time high in U.S. dollars – it has already exceeded all-time highs in perhaps around 90 or more world currencies given the strong dollar, including such key ones as the Japanese yen, the UK pound sterling and Canadian and Australian dollars!

Of course there are those who reckon gold has risen too far too fast and is thus riding for a fall.  Wells Fargo for example is advising clients not to buy gold but go for platinum and silver instead reckoning they offer better hedge solutions for investors.  However because these are very much industrial metals nowadays they are probably more vulnerable to a global economic recession than gold which both have been underperforming so far this year.  Many commentators have been predicting a big market collapse similar to, or even in excess of, that of 2008 and while this does not look immediately imminent, the warning signs are certainly there.

Whether gold will be allowed to move above $1,500 by the bullion banks, which may have other agendas, remains to be seen, but it certainly looks to have sufficient momentum to be capable of doing so - maybe not now, but in the very near future. 

[UPDATE:  Gold broke through $1,500 in U.S. trading today]

But be warned.  Should a big market crash occur gold is also likely to be affected adversely as players struggle to maintain liquidity and are forced to sell defensive assets like gold to stay afloat.  This happened in 2008, but then gold was the first major asset class to come good again and recovered its losses within about three months.  It then went on to make record highs three years later before being brought down to earth.  History could well repeat itself – it usually does!

07 Aug 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com