I came across an interesting article from the folks at GaveKal Research entitled "The Upcoming Monetary War, with Gold as an Arbiter". (I posted another article from GaveKal Research last week on the website. Special thanks to Charles Gave who gave permission to share). This is the second article and it is well worth a read. Charles Gave discusses the potential for conflict between the US and China, but he cogently argues that the fight will be less about trade and more about the struggle for dominance between the US dollar and the renmimbi.
Gave argues that since the 9/11 attacks, the US has pulled back on allowing unconstrained global access to the USD. The US is exerting its power to freeze assets of certain misbehaving countries (Iran, Russia), while only allowing the well-behaved access to USD reserves. This is a dangerous game the US is playing, particularly given the trajectory of ever-increasing US budget deficits in the years ahead, which will need to be financed. China seems set on de-dollarizing the world according to Gave. China has recently offered renmimbi swap lines to multiple central banks, so as to provide emergency lending in times of crisis. China has also recently launched crude oil (and gold) futures contracts traded in renmimbi. Gave notes that China is planning to become the world's biggest financial market by 2047, when Hong Kong reverts to mainland control, with Singapore playing a complimentary role, just as London has in recent decades to New York.
The performance of gold priced in USD versus US long duration zero coupon bonds suddenly became a lot more interesting. As Charles notes, in recent years, we have been in a stalemate, but he doubts that situation will last much longer. I hold a similar view.
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