Gold is Up 40% and More to Come
Once again, I have an inbox full of ‘yahoos’ for gold.
Where were all these people at the end of 2015?
Back when gold was sinking down to US$1,050 per ounce…
A time when the metal was at the tail end of a bear market…
Of course, we didn’t know it was the tail end of a bear market then.
Nonetheless, as gold inched closer to falling below the all-important four-figure mark, I was repeatedly told there was no use for gold.
Four years later, the yellow metal is up 40%. Even higher if you count your gold in Aussie dollars.
Does that mean that the bull run for gold is over?
Nope, not even close.
In an interview I filmed with Jim last week, he said the gold market rally is just getting started.
In fact, today’s price of gold, in his view, is actually irrelevant. According to Jim, there are bigger things driving gold.
Trade wars and China are key parts of it.
Read on for more.
Until next time,
Trade Wars: A Symptom, Not a Cause
Jim Rickards, Strategist
Financial headlines are dominated by stories about ‘currency wars’, ‘trade wars’ and possible recession.
It’s true that these stories are important and are driving the recent volatility in stock and bond markets.
A few weeks ago, China sharply devalued its currency below the critical red line level of 7.00 yuan to US$1.00 as retaliation for Trump’s tariffs.
Some new tariffs go into effect on 1 September, even though Trump delayed other tariffs because of the coming Christmas shopping season.
Trade wars are also affecting US relations with Europe, Mexico and Canada, among others.
Recently, global elite Mohamed A. El-Erian has agreed that trade wars and currency wars are important.
Yet, he takes a step back from the headlines to ask whether these problems are not symptoms of a deeper malaise…
Too much debt and not enough growth
Historically, trade wars and currency wars arise in conditions of too much debt and not enough growth.
When debt is low, trade surpluses or deficits are manageable.
When growth is high, currency exchange rates are not considered problematic.
But when debt is high and growth is low, countries are desperate to steal growth from trading partners.
They do so with cheaper currencies and tariffs on imports, which give rise to the trade and currency wars.
What if growth could be increased without resorting to devalued currencies?
What if debt could be made manageable without resorting to tariffs?
El-Erian says the root causes of debt and weak growth can be mitigated with international cooperation, selective fiscal policy, and spending on desirable goals such as improved infrastructure and stronger safety nets.
He says the issue of intellectual property theft can also be addressed inside a multilateral framework similar to the World Trade Organisation.
El-Erian’s ideas have some merit and are worth considering.
The problem is that his ideas have little chance of being pursued because of a lack of trust of elites generally, and a specific lack of trust between the US and China.
A favourable resolution of ongoing disputes cannot be ruled out, but investors should brace for the unfavourable outcome of even worse tensions on the trade and currency fronts.
China bans gold to stop capital flight
We’ve been following the story of Chinese gold purchases for over 10 years.
It was in March 2009 that I first proposed China was acquiring gold for geopolitical and strategic reasons, and not merely for monetary reasons.
I did this at a Pentagon-sponsored financial wargame at a top-secret weapons laboratory that I both facilitated and participated in.
At the time, China had about 600 tonnes of gold.
I suggested that Chinese purchases of gold would expand and persist with a view to creating a new gold-backed currency that could gradually displace the US dollar as the global reserve currency.
More recently, it also became apparent that a new gold-backed digital currency sponsored by China could help it escape US sanctions that are imposed through the dollar payments system.
Since 2009, events have played out exactly as I forecast in 2009. China has more than tripled its gold reserves from 600 tonnes to almost 2,000 tonnes.
It’s likely China has even more gold ‘off the books’ in the State Administration of Foreign Exchange (SAFE), a Chinese sovereign wealth fund that acts as an alternative to the People’s Bank of China when it comes to managing reserves, including gold.
With this as background, it came as a shock to read a Reuters article stating that China is strictly limiting gold imports, saying:
‘The world’s second largest economy has cut shipments by some 300-500 tonnes compared with last year – worth $15-25 billion at current prices, the sources said, speaking on condition of anonymity because they are not authorized to speak to the media.
‘The restrictions come as an escalating trade confrontation with the United States has dragged China’s pace of growth to the slowest in nearly three decades and pressured the yuan to its lowest since 2008.
‘China is the world’s biggest importer of gold, sucking in around 1,500 tonnes of metal worth some $60 billion last year, according to its customs data – equivalent to one-third of the world’s total supply.’
Yet there are important reasons for this import ban notwithstanding China’s voracious appetite for gold.
The first is that China is the world’s largest gold producer (producing about 500 tonnes per year), so it can continue to acquire gold internally even without imports.
The second is that China is facing a severe US dollar shortage due to contracting world trade and US tariffs.
China has enormous US dollar-denominated debts, so it needs to preserve its dollar reserves to repay those debts. Cutting back on dollar-denominated imports of gold is one way to do that.
Finally, China fears a drain on its capital account as Chinese tycoons try to get their money out of a collapsing economy or buy assets that will retain value (and can be smuggled without using wire transfers).
China still wants gold, but it has more immediate problems with reserves and capital flows.
Ironically, this stress in China is bullish for gold even if China itself reduces imports. There are plenty of other buyers in line.
All the best,