Why the US China Trade War is Bullish for Gold Prices

gold bull

The US China trade war is bullish for gold prices (long term), though the relationship between the bullish nature of gold (and silver) prices over the last 15-months and the US China trade war is at first, not so readily apparent in the below chart.

why the chinese trade war is bullish for gold

As you can see below, for the first 7 ½ months after the Trump administration started to levy taxes against Chinese imported goods in the United States, the price of gold actually displayed a downward trend before reversing into an upward trend for the last 13 ½ months.  If the US-China trade war has been bullish for gold prices, then why did it lead to lower gold prices initially? The answer is quite simple. At the start of the trade war, as in any new fight in which the combatants are unsure of how the other party will approach the fight, neither participant wanted to act too hastily or recklessly, but rather desired to test the resolve of the other participant. Thus, as observers also were unsure of how each participant’s words and threats represented mere bluster and how much represented true resolve, the media’s reporting on this trade war also significantly affected gold and silver prices during the initial phases as they tried to determine which player was playing checkers and which one was playing chess.

Consequently, the prices of gold and silver did not respond positively to the initial phase, or “feeling out” period, of the US China trade war, as a lot of misleading reporting happened in which the Western media saturated their initial reports with US President Donald Trump’s claims that the war would be won quickly and decisively. Of course, a quick decisive win would not be bullish for gold and silver prices, but an extended period of uncertainty and a narrative of a long, drawn out war would be bullish for gold and silver prices. In fact, during this initial period of media confusion in which they fomented more deception than truth about the extent of the US China trade war, the petrodollar banking cartel may have even seized the opportunity to manipulate gold and silver prices lower as a mechanism in their attempt to erode China’s resolve in the trade war battle.

The next escalation of the trade war, indicated in the chart above, in which the US struck and was then followed by a Chinese counterstrike occurred during March/April of 2018. In my opinion, this strike and counterstrike of additional tariffs were still executed during the “feeling out” phase and constituted light parries versus significant strikes.  Thus, during this phase, the impact of the US China trade war still had not manifested in the prices of gold and silver. However, by June of 2018, the “feeling out” period of combat had ended, and after both parties started to lobby bombs against one another, this was the turning point at which the US China trade war became bullish for gold and silver prices. Just a few months later, by August 2018, both participants in the trade war understood that neither party was going to wilt and therefore, both participants became fully committed to the engagement of a long war against one another. Though it  is clear that the Trump Administration leaks persistent false messages to the media about an “imminent” resolution in this trade war every time they need to produce an artificial bump higher in the US stock market, it is near comical how the media serves this purpose over and over and over again even though these fake announcements amount to the boy crying wolf. By now, to anyone that has performed their homework about the history of China’s strategies in such matters, it should be crystal clear that China is committed to executing a long strategy of chess even if the Trump administration continues to play a game of checkers in the parrying back and forth that has occurred thus far.

And this was the important development that really led to gold and silver’s very significant rally in prices since then. The fact that both parties are now fully committed to this trade war, and the manner in which this full commitment has not only shaped China’s resolve but expedited its timeline for other economic growth strategies, is the missing piece of understanding that has given rise to much higher gold and silver prices over this time that has been overlooked and completely misunderstood by all journalists in the mainstream media. China’s actions of this trade war cannot be interpreted through the lens of Western culture, as Western mainstream media journalists often do, but must be interpreted through the a deep understanding of Asian culture and China’s historical precedents in how they handle such conflicts. If there ever was a nation that had even a greater sense of national exceptionalism than America, it would be China. Every economic and business action in China is always performed with the glory of China and the uplifting of its people as the number one stressed mission. For example, since the US China trade war has escalated since its inception in January 2018, many Chinese people have stated that support for US company products is “embarrassing” and do not even want to be seen publicly using an imported iPhone over a domestic Huawei phone now. It will be interesting to see at year end, exactly how much market share Apple lost to Huawei in the Chinese smartphone market as a consequence of the trade war between the US and China. Given that I’ve observed dozens of wealthy Chinese flock to Starbucks to be seen drinking their Starbucks coffee, as Starbucks is considered a status brand in China, I’m sure that enough wealthy shallow Chinese people will still buy iPhones for the luxury status that they feel holding an iPhone publicly bestows upon them, embarrassing or not.

However, people that have never lived in China or visited China for extended periods of time tend to be clueless about how strong the societal pressure is to conform to behavior that uplifts national pride. Even China’s national gold strategy is intimately linked into promoting the glory of their nation and in providing the foundation of their economic growth not for the next year or two, but for decades to come. In every tactical business, political and economic move they make, China is never playing checkers. They are always playing chess and even willing to execute a strategy of death by 1,000 cuts that requires an inordinate amount of patience to win a tactical war. There are numerous analyses in the mainstream media, provided by Western investment executives of this US China trade war, that are completely off-base simply because the analysts providing their outlook have no understanding of Asian culture and how Asian culture factors into the progression of this trade war. Likewise, I believe that the Western media narrative of the Hong Kong protests as being solely about freedom and democracy and good versus evil is an incredibly disingenuous simpleton view embraced by the most naïve of people that likely understand nothing about  the complex and nuanced history of the British involvement in the opium wars, the rise and origins of Hong Kong Shanghai Banking Corporation, their occupation of Hong Kong on a 99-year lease, and the one country, two policy rule of law. When I’ve asked Western expats I’ve met living in Asia that have bought into the Western media narrative of the Hong Kong protests to please explain to me the importance of these factors in China’s stance about the ongoing Hong Kong protests, and to also connect the dots between the devolution of the once peaceful protests into riots, violence and destruction of private and public property to the currency war between the US petrodollar and China’s gold, I have always been met with a blank stare and no intelligent response. Perhaps I will write another article about this very topic on my blog soon.

Since the date the top brass within the Chinese government understood the Trump administration’s commitment to this trade war, which I believe happened around August of last year, this is the time that gold and silver prices really started to gain their footing. I believe, at first, that Chinese government officials may have been slightly fooled and misled by Trump’s book, The Art of the Deal, in which the negotiation tactics he discussed in this book often involved a lot of bluster and deception without follow through in action to achieve his desired results. I believe that at the early stages of this trade war, in the first half of 2018, Chinese government officials may have believed that Trump was deploying this strategy in which he was merely issuing threat after threat to bully his way to results without the real threat of execution; however, once President Trump followed through with actions to back up his threats a couple of times, at this point, China understood that they would need to significantly alter their strategy, and at this point, gold and silver prices started to rise significantly.

With this realization, several factors immediately changed in China’s long-term strategy that has benefited gold and silver prices. One, with the realization that the US China economic alliance is one that they can no longer depend upon, China shifted their long-term strategy to cut the US out of their long-term economic strategy, which no longer would require multiple agreed upon concessions to their gold price suppression scheme, a factor that I believe certain members in the Chinese political power structure had granted to the petrodollar banking cartel over the last decade that led to suppressed gold (and silver) prices. In addition, I think the realization of the severity of this trade war also expedited the time lines for China’s long-term banking and financial strategy to become completely independent of the SWIFT system. I believe that part of their shift in strategy, as a consequence of the escalation of this trade war, included more aggressive support for the pricing of the asset – gold –  that will provide the backbone to their OBOR (One Belt One Road) plan to link the economies of more than sixty nations in the Middle East, Asia, Africa and Europe. By the time this trade war really gained traction, China had already been fairly deep into the execution of a  multi-year plan to decrease their economic dependency upon both the petrodollar and the US dollar in international trade, and their ability to create higher gold prices will be the driving force behind the successful execution of their long-term strategy. In early 2018, the Chinese government launched its first oil futures contracts denominated in their domestic currency, the yuan, instead of the US dollar. Since, then the petroyuan oil futures contracts that trade on the Shanghai Futures Exchange (SHFE) has made very respectable inroads into the international oil trading market. For example, from the 10-day trading period of 17 September to 30 September (I excluded October data as the SHFE was closed from 1 October to 7 October for a national Chinese holiday), the volume of petroyuan traded futures contracts was 24%, or nearly a quarter of the volume of WTI Crude Oil futures contracts traded in New York. Curiously enough, in the midst of the US China trade war, China has also been soliciting cooperation with the CME (Chicago Mercantile Exchange) to launch new cooperate gold futures contracts on the Shanghai Gold Exchange in just a few days. I will write another completely separate article about this matter, so please bookmark this link to access that article next week.

Some may interpret this cooperation between the CME and SGE as proof that the US China trade war is just for show, and much like Republicans and Democrats that fight publicly while colluding together behind closed doors, some may believe that US China trade war is staged to cover up the massive cooperation happening behind the scenes to cement the economic futures of America and China. However, I, for one, do not subscribe to this theory. I believe the cooperation between the CME and SGE is merely one in which both parties see an opportunity to make profits, and though it is an arrangement driven by greed, I believe that the Chinese believe that they can co-opt this agreement to exert greater influence in setting international gold prices for the future in Shanghai. I know that many will likely interpret this arrangement as dangerous to China as this arrangement may provide an opportunity for US bankers to corrupt Chinese gold markets and suppress gold prices in China, but I have significant reasons to believe otherwise. Again, I will let you know of them next week.

The Chinese Yuan, as a currency, is still a long way off from being widely accepted as a stable international currency by other nations in international trade, China’s bilateral trade with every nation along the OBOR route will not be rooted in other nations’ trust in the yuan, but their strategy has been to root other nations’ trust in accepting the yuan as payment in bilateral trade in their trust in gold. Since much of OBOR’s trade routes connect primarily nations that have centuries of history of using and accepting gold as money, this plan, for obvious reasons, would be a much easier sell than attempting to root their trust in building bilateral trade agreements to the fiat currency of Chinese yuan. Though many people are unaware of this, China has a long storied history of fiat currencies becoming worthless, so it would not make any sense for them to pursue a strategy of rooting economic growth and trust among over sixty nations  to their fiat currency. I believe China’s strategy in fostering and developing increased trade along the OBOR route will be the same as their strategy when it launched its first petroyuan futures contracts – to allow other nations to easily and quickly convert the quantities of yuan they receive in bilateral trade (whether for oil or other goods) into gold if they are uncomfortable accepting billions of yuan in international trade. By using gold as the pillar of these trades, international trades will still be formally linked to the yuan, but in reality, linked to gold. In my opinion, China’s desire to pin their entire economic future to the enormous gold reserves that they have built up since the 2008 global financial crisis is not just to provide the backbone for China’s future economic growth, but also to tie  future economic fortunes of the nations involved in their revival of the historic Silk Road trading route to gold as well. 

In addition, China has not loaded up on its physical gold reserves with the vision of receiving lesser prices for these reserves in the future, but with the vision of receiving much higher prices for their gold as it slowly becomes the backbone for international trade among the OBOR nations. Thus, if the US China trade war has convinced Chinese President Xi and other top Parliament members that the US economy will no longer be an integral part of their economic future as a consequence of their escalating trade war with the US, then this would compel them to start expediting the timelines of their strategies to underpin a higher, steady gold price as well. And this exactly what I believe is manifesting now and will continue to manifest in future years.

J. Kim

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