Trade War drags into 2019…and investors will flock to gold
The end of the year is only days away.
And yet, the hot topics at the start of the year are still key topics almost 12 months later.
As I write this, the market is waiting with bated breath for the Federal Reserve Bank announcement.
Their final monetary policy meeting wraps up tonight our time. Last year, the Fed said there were four rate hikes planned for the US.
So far, we are three in. And the fourth is widely expected to be made tonight while Aussies are sleeping.
If the Fed hikes, it means the central banking boffins still believe the US economy candle the rate hikes.
However, if the Fed doesn’t follow through on their plan, it will send the signal to the market that the US economy isn’t as stable as they want us to think. If that happens, the US markets will tumble.
Then, we have the pesky trade war.
Something that began with Trump threatening tariffs on China back in March this year.
The tit for tat tariff talk has led to hostile tensions between the world’s two biggest economies…with perhaps the world’s most powerful militaries.
What started out as taxes could rapidly descend into some sort of shooting war.
However, both countries have bought themselves a three-month grace period, says Jim below.
What comes next?
A flight into assets that can withstand intense geopolitical pressure.
I’ll give you a hint. It’s a shiny, yellow, useless hunk of metal.
Jim, will give you the rest of the details.
Until next time,
Trade War drags into 2019…and investors will flock to gold
Jim Rickards, Strategist
‘I will not be the one to break the peace we have made here today.’
With those words, the Godfather Don Corleone, played by Marlon Brando, ended the war among the five mafia families in New York.
This peace was hammered out at a dinner among the heads of the five families.
Two weeks ago, the eyes of the world were on Buenos Aires, where President Trump, China’s President Xi Jinping and some top aides had a private dinner to discuss the current China-US trade war.
When I saw the photos of the dinner on Sunday morning (below), my mind flashed back to the dinner scene from The Godfather…
In the movie version, no one in the room trusted anyone else.
Did anyone at this table trust anyone?
G20 countries in a ‘time out’
In the Godfather, all of the participants deemed it in their best interests to make a peace treaty so they could return to their illegal businesses without the disruption of hit men, police investigations and vengeance.
There would be time for that later.
In the short-run, it was time to normalise the situation.
Back at the G20, the same dynamic prevailed in Buenos Aires. All of the key parties were at the table. Trump’s team included Mike Pompeo (secretary of state), John Bolton (national security adviser), Robert Lighthizer (US trade representative) and Steven Mnuchin (secretary of the Treasury), among others.
The Chinese team was led by President Xi Jinping and included the top figures in Chinese trade and finance.
No one trusted anyone from the other side.
Trump knows the Chinese have lied about their good intentions on trade for decades.
Likewise, the Chinese know that the US does as much hacking and surveillance aimed at the Chinese as they do to us.
Fans of The Godfather know that the ‘peace’ in the dinner scene did not last long. In due course, Michael Corleone takes over the Corleone family.
When Don Corleone dies, Michael plots his revenge on the rival families. In the climactic scenes, all of Michael’s top rivals are assassinated.
This results in peace being restored because there is no one left to oppose Michael and his power is dominant.
The same is true in the trade wars.
What happened in Buenos Aires is like a truce or a time out, but the war itself is not over.
More vague elite talk
For his part, Trump agreed to delay imposing new tariffs on China after 1 January 2019.
Specifically, increased tariffs (from 10% to 25%) on US$200 billion of Chinese imports will not go into effect.
For his side, Xi agreed to buy a ‘very substantial’ amount of increased US exports from the agricultural, industrial and mining sectors of the US economy.
Meanwhile, both sides agreed to new negotiations on forced technology transfers, financial cyberattacks and theft of intellectual property.
This agreement has a 90-day life.
If substantive progress is made, the concessions may be extended along with new structural agreements that reflect progress on the issues to be negotiated.
If the negotiations are a failure, then the US tariffs will be imposed and China will presumably resume its bad behaviour in the intellectual property and cyberattack arenas (if they ever stop it in the first place).
Based on past behaviour, the prospects for an end to the trade war are not good.
While this pause may benefit both sides for political reasons, none of the underlying issues have been resolved and the likelihood of resolution is still low.
The Chinese are infamous for playing for time. They offer some happy talk and vague promises, and negotiating partners such as the US accept the offer in the hope that ‘this time it’s different.’ It never is.
The Chinese did not offer to buy a specific quantity or specified amount of goods from the US.
They agreed to opaque phrases such as ‘very substantial.’ (How much is that, exactly?)
The Chinese also offered to address ‘legitimate’ US concerns about theft of intellectual property. What if the Chinese don’t consider our concerns to be ‘legitimate’?
In the end, the Chinese could offer token concessions and use the 90-day window to cook up new happy talk.
Their hope will be that after 90 days of negotiations and some minor concessions, the US will be reluctant to break the peace or impose the additional tariffs.
And the ultimate winner is…gold
With this much distrust and Chinese bad faith in the air, what’s the best way for investors to play the likely re-emergence of the trade wars in April?
China has tentatively agreed to buy more output from the US mining sector as part of its temporary trade-war peace treaty with the US.
The largest and best-managed gold producers in the US also produce other metals that are in high demand by China including silver, copper, iron ore, lithium and cobalt.
A lift in purchases by the Chinese from miners will lift the gold price alongside the prices of those other strategic and industrial metals.
Conversely, if the US-China trade wars resume in full force, gold will continue its recent rise as a safe-haven investment.
In recent years, both US Treasuries and gold have can provide a safe haven for investors.
But US Treasuries have taken the lion’s share of these capital flows.
If China and the US go back to the trade wars, Chinese purchases of US Treasuries will decline.
This will make US Treasuries an unattractive destination for investors worldwide.
This will also leave gold as the only unaffected safe haven.
All this puts gold in a win-win position.
Gold miners will rally if China keeps its promise to buy more mining output.
Gold bullion will rally if the trade wars resume. Either way, gold and gold miners are winners.
The first three months of next year are going to be an exciting time for investors.
All the best,