Despite propaganda to the contrary, China’s rise will be the big story in 2017.
Stephen Leeb: “Gold is back in business and barring some unforeseen event should soon resume its uptrend. As I recently argued, anything bringing oil to the dance would do the trick, and OPEC’s agreement to cut production fits the bill.
Rumors circulating midweek that China planned to limit gold imports don’t alter this conclusion. They likely indicate an effort either to eliminate arbitrage (stemming from the fact that gold in China trades at a 10 percent premium to gold traded in the West) or talk gold down. China’s thinking on gold hasn’t changed, and the case for a near fantastical bull market in the monetary metal has moved closer…
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Meanwhile, gold, though up 10 percent year to date, has a lot of catching up to do as it has lagged commodities. Most commodity indexes are up more than 20 percent, and some individual commodities such as zinc and iron ore have climbed over 50 percent.
I admit to being somewhat surprised by OPEC’s agreement to cut production at this time, though the 1.2 million barrels a day amount to only 1.5 percent of world supply. Even partial compliance will result in world demand for oil growing considerably faster than supply, including projected increases in shale. As a result, the world will likely end 2017 with little if any excess supply.
High Inventories Holding Back Galloping Oil Prices
Keep in mind, the 1.2 million-barrel cut is more than enough to offset the greater than 4 million barrels of increased OPEC supply since mid-2014. By the end of next year, the world will need that 1.2 million barrels and more. Right now, only high oil inventories protect us from galloping oil prices. But that is for another time.
The reason I had tended to think OPEC would put off a production cut was to give China more time to accumulate the oil it will use to create a yuan-backed benchmark. The reason was the potential trade vacuum created by the likely U.S. abandonment of TPP. And there were clearly other factors. In the past week it has become apparent that China is restricting capital flows. At first glance this might seem a step backwards in China opening its markets, but – and maybe I’ve spent too much time watching the recent world chess championship matches – I see the restrictions along with OPEC’s actions as logical moves towards establishing a more open market.
Yuan Sees Biggest Surge vs Dollar In Almost A Year
Higher oil prices will hurt the U.S. economy, even after accounting for the gains from fracking activity, and challenge the seemingly unstoppable dollar. Although the yuan has held its own this year against broad-based currency baskets that include the euro, yen, pound, and most Asian currencies, the dollar has been the strongest currency of all. But this past week, following OPEC’s move and China’s more restrictive stance on capital, the yuan scored its biggest gain against the buck in almost a year.
While the strengthening U.S. economy makes a December interest rate hike nearly certain, the economy remains vulnerable as higher oil slows overall economic activity. Yesterday’s employment report suggests manufacturing already has slowed because of the high dollar, which has hurt exports. This means the Fed can’t risk being too hawkish lest it push the dollar higher still. A lower dollar seems likely and so does a higher yuan.
Internationalization Of Yuan Followed By Gold Entering Monetary System
One result will be that oil priced in yuan will decline from current levels. But there is much more. My guess is that the prospective Trump presidency in conjunction with a U.S. economy resembling a muscle-bound fighter with a glass jaw has impelled China to speed up its plans for an oil benchmark. This will be a major step in the internationalization of the yuan and will be followed by the introduction of gold into the monetary system.
Most people, if asked to pick this past fall’s most notable date, would likely choose November 8, U.S. election day. I’d give an equal nod to October 27, when Chinese President Xi was anointed “core leader.” In China, that’s a big deal. The only previous core leaders have been Mao, Deng, and Jiang. Jiang, 90, was instrumental in Xi’s rise to the presidency, and he’s still around. But he also has been at the heart of Chinese corruption and over the past four years a bitter enemy of Xi, who has waged war on corruption.
Jiang rose to power with Deng’s blessing in the wake of the 1989 Tiananmen Square uprising. He served as president for 10 years and was the country’s unquestioned leader for another 10 years. He also was one of the most corrupt politicians in China’s history. Few argue that any of the individuals imprisoned or expelled from the Communist Party for corruption are innocent. Xi’s anti-corruption drive has reached far and wide, to the highest levels of the military to industrial barons heading corporations ranging from health care to energy. The illegal gains confiscated are thought to be in the hundreds of billions, and they occurred with Jiang as core leader.
China To Finish Cleaning Up Corruption
It’s revealing that the newspaper Epoch Times has viewed Xi’s elevation to core leader in a mostly favorable light, feeling it will let him finish the job of cleaning up corruption and ridding the country of Jiang’s cohorts. The newspaper, which admittedly has ties to the Falun Gong spiritual group that was severely persecuted under Jiang, is fiercely anti-communist and has often railed against Xi and other of today’s party leaders, so its praise of Xi is noteworthy.
Perhaps the most relevant comment the paper makes is:
“Xi Jinping’s leadership group have faced numerous economic problems since coming to power…. but not all of them are because of the system…. China’s financial and stock markets became battlegrounds for life-and-death political rivalries to play out on. The group who found its power rapidly collapsing – Jiang Zemin and his faction – think nothing of using China’s economy as a bargaining chip. They’re content to cause a meltdown of the financial system, to unleash chaos if they need to …. The stock market crash of June and July last year was a result of all this.”
With Jiang’s son under house arrest and Jiang close to being arrested, the group’s power clearly has waned dramatically. Also clear is that China’s markets have been much better behaved in 2016 than in 2015. There have been no crashes, no tumultuous reversals (in contrast to our own market following Trump’s election).
China’s Oil Exchange And An SDR Backed By Gold
With the yuan under control and likely to rally, and the U.S. possibly facing conditions that could resemble 2008 when rising oil and a tight Fed were catalysts for the market crash, China may see itself as ready for the big time sooner – possibly in 2017’s first quarter – than later. And the big time starts with an Eastern oil benchmark traded in yuan in an open market that includes not just oil but most other commodities as well. Gold will lead oil and other commodities to much higher levels, and the yellow metal will really take off once it becomes clear that the yuan or the SDR or some combination will be backed by gold.”
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