Gold: A New Trade War Weapon?

Ahead of the Fed’s key meeting next week, gold continues to meander sideways to lower.

This is the key short-term gold chart.

I’ve referred to the US-China tariffs as a “trade skirmish”.  Importantly, since the skirmish started, the price action of the yuan against the dollar looks almost identical to the price action of gold against the dollar.

Tariffs are negative for the Chinese stock market and positive for the dollar.  They don’t do much harm to the Chinese or American economies other than producing some mild inflation. Having said that, because China exports more to America than America does to China, China can’t win a tariffs skirmish.  What China can do is restrict exports of products that America needs, like rare earth minerals.

If that happened, the US government would almost certainly respond by refusing to export key electronics parts and agricultural products to China.  That escalation from a skirmish to economic war would cause the US business cycle to peak pre-maturely, and the bull-run in the US stock market would end.

Also, the Fed’s rate hikes and quantitative tightening are likely to make 2018 a peak for stock market buybacks, and Trump is on the warpath against market leaders like Twitter and Facebook.

The bottom line is that if the trade skirmish becomes a war and damages the US economy, Trump is going to become more likely to use some form of dollar devaluation as a weapon.

The IMF rules clearly state that countries cannot use currency manipulation to fix their trade deficits.  Having said that, most governments have a habit of breaking rules. 

Trump could try to convince other G7 members to launch a “Plaza 2.0” dollar devaluation.  If that effort failed, he could simply ignore the IMF, or he could order the Treasury to begin a gold buy program, which is not a violation of IMF rules.

Clearly, many top bank FOREX analysts believe the trade skirmish will soon become a war involving currency devaluation.  I put the odds that it happens at 50% now and trending higher!

Gold price enthusiasts would almost certainly benefit from an escalation in the trade dispute.  In terms of stock market investment, well, the bottom line is that America is an ageing society with a population vastly smaller than China.

US GDP is likely to fall to under 1%-2% over the long term, while China is likely to grow at 4%-5%.  This is the key Chinese stock market chart.

The bull wedge looks solid, and all the tariff news appears to be priced in now.  Chinese markets simply feel cleaner and fresher than sanctions-clogged American markets.  US bank, growth, and energy stocks are a solid part of my portfolio (and probably always will be), but China is beginning to lead a new era… a gold bull era.

America is spending a paltry $100 million on infrastructure projects around the world, while borrowing $500 billion a year to buy bombs and military gadgets.  

In contrast, China is spending more than a trillion dollars on global infrastructure with its spectacular “One Belt One Road” program.   

The Chinese stock market will almost certainly rise relentlessly for many decades.  So will gold, as China becomes an infrastructure-themed empire viewing gold as the ultimate asset.  The bottom line: Out with the old.  In with the new!

This is the GDX chart.  Gold stocks are starting to look quite interesting now that the Vanguard selling appears to be finished.

There’s a potential inverse head and shoulders bottom forming on the daily chart.  A rally to the $19.50 area would bring the pattern to life.

That’s another look at the GDX daily chart.  Note the RSI oscillator at the top of the chart.

This important oscillator has been rising while the price fell from $18.15 to $17.28, and that’s what many technicians call a bullish non-confirmation. 

The strengthening technical situation is occurring in the face of more tariffs and the upcoming Fed meeting.  That suggests that all the bad news may be priced into the gold stocks market, but I would suggest that investors shouldn’t get overly excited until next week’s Fed meet is out of the way.

This is the silver stocks ETF chart.  There’s a substantial bullish non-confirmation occurring between key technical indicators and the price.

As the US business cycle peaks, I suspect it will be a “stagflationary” peak, and silver stocks tend to be market darlings in that situation.  2019 looks like it could be a very interesting year for silver price enthusiasts, and the short term indicators suggest the time to get poised for the upside fun is right now!

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