by Sean Kelly
Cities burning. A plague on the land. Soldiers fighting mobs.
We know it sounds like an old Cecil B. DeMille movie.
But this isn’t Hollywood. It’s real life today.
All of these things—a public health crisis, the pandemic lockdown, civil unrest, property destruction—are an enormous drag on prosperity. They are a tax on opportunity and growth at the very least and are always met by massive government spending.
In our case that means more money printing.
The shredding of the social fabric and civil disorder are good reasons to own gold. So is a historic economic downturn. But there is another story that is being crowded off the front pages. Something in addition to the riots and looting. Something more than the coronavirus, businesses that are closed never to reopen, millions unemployed.
It is not more important that our domestic chaos. But it must not escape your notice.
We are also living in an extremely dangerous geopolitical moment. International tensions are running higher than at any time since the Cold War—this time between the US and China.
The war of words is escalating. China has “ripped off the United States” like no one before, says Trump. For its part The Global Times, a Chinese government newspaper, accuses Trump of “typical international hooliganism.”
Cracking down on Hong Kong’s autonomy, China has imposed a new national security order that would allow its secret police, the Ministry of State Security, to operate in Hong Kong the way that secret police operate.
In response, the US is ending Hong Kong’s preferential trade status. (That seems like a peculiar policy since it will hurt China, but it will hurt Hong Kong more.)
The shipping lanes of the South China Sea are growing crowed with both territorial claims and warships, making likely a confrontation even over an accident. The Taiwan Times is reporting that China’s People’s Liberation Army is conducting drills in preparation for an assault on the Pratas Islands, held by Taiwan. On the American side, reports the newspaper, “in recent weeks a succession of U.S. aircraft and naval vessels have patrolled the area south and west of Taiwan in response to frequent forays into Taiwanese airspace by PLA aircraft.”
Not every front of the Sino-American divide is territorial. There are commercial fronts as well. US Secretary of State Mike Pompeo is employing maximum bluster in the direction of Israel and other countries against deepening economic ties with China. One of Pompeo’s aims is to impede the adoption of China-based Huawei’s 5G networks.
Nevertheless, European officials are now speaking quite openly about the “the end of an American-led system and the arrival of an Asian century.”
Other charges are bouncing back and forth across the Pacific. Legal cases are being drawn for COVID-19 claims against China. China is signaling that it will retaliate against the US Huawei ban, with Boeing, Tesla and Apple all mentioned. Increasingly discussed are major restrictions against Chinese students studying in the US.
Meanwhile, Republican strategists and early ads have made clear that they intend China to be central to their presidential campaign. Democrats won’t let themselves be outdone on the issue.
Bear in mind that as all this goes on, and as US spending soars and the national debt compounds, China remains a major US creditor. It holds $1.08 trillion in US Treasury securities at a time the US needs all the creditors it can find. China does not loan all that money to the US as a favor. It needs dollar reserves for its own purposes, such as settling international trade deals. But as Russia discovered in replacing most of its US Treasury holdings with gold, China can get by with a lot fewer dollar-based reserves.
Rising tensions carry the very real prospect—and at some point the inevitability—of massive Chinese disinvestment in the dollar and an accelerated reliance on gold –not just as an alternative, but as an upgrade to their dollar holdings.
It is a reasonable thing for China to do. Afterall, prominent figures on Capitol Hill are making the suicidal suggestion—suicidal for the us—that the government renege on China’s US debt portfolio.
That would end the reign of the dollar, crash the stock market, and destroy the bond markets.
China has been getting ready for this moment for a long time. Since 2006 its gold reserves have grown from 600 tons to 1,948 tons. Bear in mind, that these numbers from the People’s Bank of China reflect official state holdings. But many observers believe they substantially understate China’s gold position. Most agree that there has been a tremendous flow of gold into private hands in China as well, mostly from Europe and the West. At the same time, China remains far and away the world’s largest producer of gold.
Stated in the terms of personal financial management, China has diversified its portfolio with an emphasis on gold. It is investing for a crisis. It knows exactly what the Federal Reserve is doing and anticipates the dethroning of the dollar as the world’s reserve currency.
China has been getting ready for this moment.
We think you would be wise to diversify into gold as well, now, in this time of chaos and crisis.