Back in September, I wrote a commentary in which I linked U.S. tariffs against Chinese pipe imports to the surge in the price of gold (“Has Trade-War Started Between U.S. and China?”). At that time, gold had just (impressively) broken above $1000/oz – smashing through resistance levels which had restrained it for most of the year. Days later the U.S. announced large duties against those Chinese imports.
Skip ahead four months. Gold started the year marching higher, and on Tuesday, January 5ththe U.S. announced additional duties on those Chinese steel products. In this game of tit-for-tat, it is difficult to say which of the two parties is instigating these actions and which is “retaliating.” The causality issue is especially difficult in this situation since applying duties is a process which takes many weeks – and certainly the Chinese government would have been aware of “rumblings” that additional, punitive duties would be applied. On the other hand, pushing up the price of gold (and silver) through buying up supplies is a tactic which can be commenced instantaneously.
What is important here is that (in my view) the Chinese government is sending the Obama regime a loud message: attack Chinese imports (and thus its manufacturing sector), and China will dump U.S. dollars to buy gold – a double-whammy for the U.S. government and the Wall Street oligarchs they serve.
There are two, very good reasons why it is highly unlikely that China would engage in a standard trade war with the U.S. – where one country initiates duties/tariffs, and then the trading partner affected by those tariffs retaliates with tariffs against the first country. First of all, with the U.S. economy so much more fragile than the Chinese economy, and with a standard trade-war always harming both countries, China does not want to engage in actions which could cause this Titanic-sized economy to immediately sink to the bottom of the ocean.
This would result in harm to China through both a total collapse in its exports to the U.S. and a total collapse in the U.S. dollar – which would lead to hundreds of billions of dollars in losses on its U.S. dollar holdings. Of course, the impact to the U.S. would be many times more severe, but China is much more interested in the stable growth of its own economy than merely scoring points in a trade war.
The other reason why China is unlikely to engage in a tariff-for-tariff strategy is because the U.S. exports so little to China that there are not a lot of targets to focus on. Instead, China is much more likely to engage in subtle/indirect counterattacks against the U.S. Pushing up the price of gold and silver is one form of such indirect attacks – since the rising price of gold and silver is essentially a vote of non-confidence in the U.S. dollar, and undermines its status as “reserve currency” (see "Dollar's Days of Dominance Dead").
Similarly, the other means of Chinese retaliation is/has been in the form of assorted trade deals and bilateral currency-swaps, which also serve to undermine the U.S. dollar as reserve currency. The reason why this is such a point of vulnerability to the U.S. is that the status of the U.S. dollar as the (waning) reserve currency for global commerce requires most of the nations of the world to have (relatively) large holdings of U.S dollars – a huge source of “demand” (and arguably an artificial form of demand).
When the U.S. dollar officially loses its status as reserve currency, instead of needing to hold U.S. dollars, every country on Earth will be looking to dump dollars as fast as they can. This is a critical dynamic to the U.S. government. Without the artificial demand for U.S. dollars propping-up its valuation at a level many times higher than its actual worth, the U.S. would need to engage in a large, instant devaluation of the dollar (to something close to its real value) in order to end the exodus away from U.S. dollars (since those still holding dollars would already have taken the hit on the exchange rate).
While U.S. talking-heads always refer to such a scenario as being “great for U.S. exports” (despite no longer manufacturing any goods to be exported), they always forget to mention the other side of the coin: a huge, immediate spike in inflation. If you cut the value of the dollar in half, then ipso facto prices for all U.S. consumer goods would roughly double.
A doubling in prices is the same thing as saying that the purchasing-power of U.S. consumers would be cut in half. Think about what that would do for U.S. retailers, the U.S. government, and U.S. employment. With consumers suddenly buying half as many goods in what is totally a “consumer economy,” this would send the U.S. into a debt-implosion spiral for which no amount of new, Bernanke Monopoly-money could compensate.
What this means is that a U.S./China trade-war will quickly present a very revealing pattern: the U.S. attacks Chinese manufacturing and China attacks the U.S. dollar. The pattern itself will also do damage to the U.S., since the moment there are more “rumblings” about U.S. tariffs against China, traders will begin dumping dollars, buying gold, or both – in anticipation of China's response.
Keep in mind that in a trade war, right and wrong are totally irrelevant concepts. In a trade war, the larger (or stronger) economy wins. As Canadians, we have had this lesson hammered-home to us, through decades of illegal tariffs against Canadian lumber imports and other goods levied by the U.S.
In the case of softwood lumber Canada won every hearing before the original Canada/U.S. trade panel, the subsequent NAFTA trade panels, and in several appeals to the World Trade Organization. The result of decades of fighting was that the U.S. ended up (illegally) retaining billions of dollars in unlawful import duties.
Today the shoe is on the other foot. Now it is China which is the dominant trade partner, with the U.S. being on the side with no leverage. The U.S. needs cheap, Chinese imports – since U.S. consumers can't afford to purchase more expensive goods. The U.S. needs China to keep lending it money (although that source of funding has virtually dried-up).
The U.S. media continue endless blathering about how China “needs” the U.S. consumer, and “needs” the U.S. as a trade partner. This is plainly silly. No creditor “needs” a deadbeat. Handing China soon-to-be-worthless IOUs in exchange for its manufactured goods is not “trade” - it's simply another form of borrowing.
China would “need” the U.S. if and only if the U.S. was either paying China in full for its imports, or providing China with essential goods/assets needed for its own economy. In fact, any time China seems about to buy some significant U.S. asset, the U.S. government “slams the door” in China's face – as with its recent attempt to purchase a U.S. gold mine.
Meanwhile the clueless U.S. media are oblivious to the fact that China now has the world's second-largest economy, one-fifth of the world's population, vast pools of personal savings, and a domestic economy growing at close to 20% per year. The only thing China “needs” from the U.S. is for the U.S. to pay its debts (in full). Since that isn't even theoretically possible, the U.S. has virtually no economic leverage with China. Thus, in any U.S./China trade war, China will win and the U.S. will lose. Case closed.
For precious metals investors, a byproduct of this U.S./China spat should be an acceleration in the advance of gold and silver. This is a very good reason why precious metals investors should closely follow this simmering trade war between the U.S. and China. Along with China, precious metals investors will also be winners in this war.