China and Russia Stockpile Gold While Gold Prices Are Artificially Low
China is aggressively buying gold in an effort to build its reserves. While it has not been selling off its US dollar holdings, there’s evidence to suggest China wants gold to upend the US dollar as the global reserve currency of choice. The US dollar has long served as a safe haven asset. As the world’s number one superpower, the US’ currency is expected to maintain its value and stability. In fact, the US has been short selling gold in the paper markets to better ensure the US dollar maintains its supremacy as a reserve. This behavior has artificially suppressed the price of gold and has enabled China and Russia to buy gold cheaply. With gold prices still depressed, we may begin to see other countries’ central banks follow the lead of China and Russia.
China’s ongoing trade war with the US hasn’t benefited either country involved in the conflict so far. The tit-for-tat tariffs and political posturing are forcing China and the US to hunt for negotiating leverage. Negotiating Leverage, of course, is needed to end the trade war on somewhat favorable terms. Moreover, each country knows the world is watching the conflict. The US and China need to consider their future positioning on the world stage. If China can begin to wean the world off the US dollar, it will deal the US a crippling blow. China also has a willing partner in disrupting the US’ world standing: Russia.
Russia has been selling off the US treasuries that comprise its reserves. Some analysts speculate the reason for doing so was to hurt the US. A US creditor selling US debt could send the prices of treasuries higher, though Russia doesn’t own enough US debt to make much of an impact. Other analysts suggest Russia’s sale of US treasuries protects Russia from the imposition of US sanctions restricting its ability to trade US treasuries. Whatever the case may be, tensions with the US have pushed Russia to buy gold. It now has the fifth largest stockpile of gold in the world.
Hedging Against Recession
Speculation about a global recession has been circulating for quite some time now. We’ve reached a late economic cycle, as the bull market that had been charging forward for over a decade finally lost steam. One worrisome symptom of late cycle economies is slowing growth. Debt is predicated on growth, so as growth slows, halts, or contracts, debt can no longer be serviced. With this in mind, the US’ addiction to debt has become a self-inflicted wound that gives countries reason for pause. If the US struggles with its debt, the US dollar could decrease in value. Because the value of gold and the US dollar are inversely correlated, gold would be a better store of value in the event of a recession. The late economic cycle and indebted nature of the world’s premier superpower may give countries a reason to follow China and Russia in buying gold.
A New World Order
In previous posts, I’ve mentioned the emerging Chinese and Russian threats that the US needs to contend with. Fights for land, resources, technological dominance, and the reigning system of government will continue for the foreseeable future. The fight being waged over the dominant currency should therefore come as no surprise. If China and Russia prove that gold is not just a viable alternative to the US dollar, but a favorable one, it will further threaten the US’ global influence. When China and Russia partner together against the US, it’s important to pay attention. Let’s hope the government is on high alert.
Do you have thoughts about the dynamic between China, Russia, the US, and gold prices? Leave a comment below or contact me directly.