This is why China is buying so much gold.
Within hours KWN will be releasing two audio interviews. But first…
Quick Update: We Only Have Weeks
July 17 (King World News) – Ole Hansen, Head of Commodity Strategy at SaxoBank: IEA chief warns of risk to global energy security if Strait of Hormuz remains shut
The executive director of the International Energy Agency (IEA) has warned that global energy security is at risk without an increase in oil shipments through the Strait of Hormuz.
“Oil security is still a critical issue,” Fatih Birol told a Council on Foreign Relations event. “We should be worried, and I am worried, if the situation does not improve in the next few weeks.”
Gold & Silver
Alasdair Macleod: In the fog of war, truth is the casualty. Gold and silver prices will reflect uncertainty over outcomes. All that traders know for now is that bond yields might rise further.
Well-informed analysts who follow geopolitical developments have concluded that America and Israel have lost the war against Iran, and Hormuz will remain closed. But investors are driven by sentiment, which is basically their reading of past market trends relative to current prices. Never has the gulf between the two assessments been greater. We discuss this divergence, the reasons behind it, and the probable outcome for markets, and in particular for gold and silver.
There are two interrelated facts which must be noted. The first is that the US/Israeli attempt to destabilise Iran has failed, and consequently Hormuz will remain shut for the foreseeable future. And the most recent evidence is that Iran is increasing the pressure on the US by renewing attacks on their assets in the Gulf. Furthermore, there are early signs that the Houthis in Yemen will get more actively involved and assist Iran by closing the Bab al-Mandab strait to shipping, restricting oil exports from the Saudi terminal at Yanbo.
Despite the fog of war, we can be certain that the effective elimination from global markets of 15 million barrels a day of crude and condensate plus a further 5 mb/d of refined petroleum products such as diesel and jet fuel will impact prices with shortages driving them higher. In addition, global shortages of fertilisers, sulphuric acid, and helium to mention just a few oil derivatives will have their impact. China’s response has been to protect her economy by stopping fertiliser and sulphuric acid exports, further tightening global supplies.
The second fact can be discerned from China’s policies via-a-vis the US dollar, which it has been dumping as rapidly as possible. Being closely involved with Iran, China’s intelligence appears to conform with what independent intelligence analysts tell us: that Iran has won the war and is out to destroy the US presence and her relationships with GCC members in the Middle East. Consequently, the dollar is losing credibility, which is why China is selling them and establishing a global gold trading facility in Hong Kong.
China expects nothing less than the death not only of the petrodollar, but of the fiat dollar itself.
Investors in western capital markets have been broadly oblivious to these developments. But with renewed Iranian attacks and increasing bellicosity from the US administration, there is no doubt that this is beginning to affect bond markets.
Today’s markets are driven by sentiment and not fundamentals. This is to be expected in a credit bubble where greed dominates over caution. For decades, investors have increasingly turned to charts in the way Romans examined entrails of goats to predict the future. It is easier than trying to think things through. Technical analysis is valuable for discerning sentiment and trends, but they are right until suddenly they are not.
This is the chart which is now worrying investors:
Conventional technical analysis indicates that the yield on the 10-year US treasury note is in an uptrend, also apparent in most of the other G7 bond markets. Furthermore, there are signs that the yield is breaking out above a three-year consolidation pattern. The next chart puts the importance of a breakout into context.
If bond yields do rise to multi-decade highs, the consequences will be dire for government finances. Knowledge of the certain impact of the continuing closure of Hormuz confirms that the US and other G7 economies face a slump in business activity due to energy and derivative prices reflecting the lack of supply, particularly of diesel. And we should know that governments through their central banks have a duty to intervene creating all the credit necessary to support their economies and financial markets.
Consequently, budget deficits will simply soar, so investors are right to worry about rising bond yields, and the potential for them to go much higher as debt traps are sprung. Already, with over $39 trillion of government debt, US funding costs are going through the roof:
For now, investors are wary of bond yields but not yet of the dollar’s purchasing power. Instead, they see stability in its trade-weighted index:
This Is Why China Is Buying So Much Gold
Since late-January when the $TWI bottomed at 96.2, which coincided with the high point for gold the dollar has been in an uptrend,. For hedge funds pair-trading between gold and the dollar, this relationship clearly matters. But given the crisis over Hormuz and shortly the Bab al-Mandab Straits, they are looking at the wrong thing. As the ultimate insider, China realises that the next chart is what really matters:
That the dollar has rallied against the other G7 currencies is not relevant. They are all facing an accelerating terminal decline, priced in gold. And this is why China wants to make sure that it controls international gold markets by establishing a new settlement facility in Hong Kong to replace western markets. It is also why it continues to buy gold, silver, copper, and to retain other commodities which priced in dollars will rise as the dollar and the other G7 currencies fail.
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