After a wild weekend that included geopolitical instability, it appears that the trade war is accelerating China’s timetable for $20,000 gold.
Trade War Prelude To Massive Gold Revaluation
April 9 (King World News) – Dr. Stephen Leeb: “Can the brewing trade war between the U.S. and China, which would be lose-lose for everyone, be averted by a win-win alternative? I think it can. In fact, I think China already has taken some initial steps that could lead to this more benign outcome – benign, at least, over the shorter term.
Gold is at the heart of it. I believe a bull market in the metal already has started and promises to be one of the greatest ever. Gold’s revaluation upward offers a path away from a trade war…
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The March To Gold’s Rise
Dr. Stephen Leeb continues: “The Eastern oil contract traded in yuan, which I’ve talked about a lot, is one step on the march to gold’s rise. Trading on such a contract began in late March in the Shanghai free zone, and so far, so good. The contract already has attracted the attention of two major Western trading companies, Glencore and Trafigura, and I expect others to follow.
But while the petro-yuan is the most visible step in the gold/yuan/dollar dance now underway, something else has been occurring under the radar – getting no media attention whatsoever – that is equally significant. In fact, when I came across it, it was pretty mind-blowing. It’s the fact that in the past two years, gold and the yuan have been moving virtually in lockstep with each other. This quite remarkable reality – which I think China has been deliberately engineering – suggests an alternative path to a trade war that the U.S. might readily accept.
To explain why, I need to backtrack a little. Before launching its oil contract traded in yuan, China had to make sure that the yuan inspired confidence. Many investors, remembering the yuan’s sharp devaluation in 2015, still worried about the possibility of intervention by the Chinese government. So China took steps to make its markets more open. Recently Morgan Stanley, the keeper of foreign stock benchmarks, acknowledged those steps and allowed many more Chinese stocks to join its benchmarks.
Gold & The Yuan Tracking Each Other For Now
A further reason for confidence in the yuan is that it’s convertible into gold on the Shanghai Gold Exchange International (SGEI). That’s an attractive feature, though not quite the same thing as backing the yuan with gold. After all, it entails taking physical possession of gold, which can be a hassle: The gold, whose price can fluctuate, has to be stored, possibly shipped to another country, or exchanged back into yuan or even dollars to be used in other commercial transactions.
A better alternative would be if the yuan’s value were determined by gold’s price. That would mean anyone holding yuan would be assured that its price would fluctuate in line with gold’s price. And as noted above, that is exactly what the Chinese have been doing behind the scenes. As our chart shows, for more than a year the moving average (M.A.) of gold priced in yuan has been steady. How steady? The average of the M.A. since January 31, 2017 has been a little less than 8,500 yuan per ounce of gold. The fluctuations around 8,500 have been less than 1.5%.
I compared this with volatility levels of other assets considered safe, such as long-dated U.S. bonds. Nothing comes even close. Long-dated bonds, for instance, are roughly eight times more volatile. In other words, over the last 14 months, the safest – least volatile – place you could have parked your money has been in gold priced in yuan. And since during that time gold as priced in dollar has risen, you also would have gotten solid gains as well.
My guess is that the Chinese have been experimenting over the past year or two to make sure they could peg their currency closely to gold. By any criteria the experiment has been a success, and I’d bet, too, that thanks to China’s hoard of gold, the experiment likely has encompassed guiding the price of gold as well as the yuan. But before anyone reading this who likes to play games with arbitrage get too excited, my advice is to calm down – unless you are covering yourself against an upside breakout in gold priced in yuan.
The Trade War And Rising Gold
You may be wondering if or how this ties in with averting the pending trade wars, where I started this article. It does, but the connections are complex, so bear with me. I’ll start with the comment I’ve quoted in the past from a Chinese official who said no sovereign country should want to have the world’s reserve currency. That’s because a reserve currency always will be overvalued because of demand from countries that need it to conduct trade.
When its currency is overvalued, a country has two choices. It can run trade deficits. Or it can restrict the flow of its currency, which, however, puts tremendous strain on the world’s economy. The overvaluation of the dollar, inherent in its role as a reserve currency, is at the heart of the trade deficits that have gotten Trump so riled up.
Instead of both countries hurting each other with tariffs, China could offer the U.S. the promise of a steadily appreciating yuan. That wouldn’t mean the yuan would double overnight. Rather China could agree that over a fixed period of time the yuan would gain a fixed amount versus the dollar. This offers a way to let the dollar fall – improving the U.S.’s ability to export goods – without leading a major worldwide on economic growth.
At the same time, as the dollar falls, gold will be rising, for two reasons. One is China’s ability to control its price, as evidenced by the yuan/gold link we pointed to above. And second are systemic changes in the global economy – the rising importance of a rapidly growing developing world – that will lead to commodity scarcities and rising commodity prices, which go hand in hand with rising gold.
I recently cited Science Magazine as saying the current infrastructure boom in the developing world is the greatest in the history of mankind. This massive multi-trillion-dollar build-out is likely to last more than a generation and will require massive amounts of commodities.
The Middle Kingdom Values Gold
It’s an open question if the world has enough resources to achieve the most fundamental goal of this infrastructure boom, which is to transition from waning stored energy – i.e., fossil fuels – to renewable energies. But what’s not an open question is if commodity prices will rise. The Middle Kingdom is aptly named as it is at the center of the developing world and the infrastructure boom.
The conventional wisdom is that China needs to keep exporting at a good clip in order to sustain economic growth. But to the extent this is true, it applies to the shorter term. Longer term, China wants to have a more richly valued currency, because that will give it the greatest ability to acquire the ever scarcer commodities it will continue to need to develop its economy. And what better way to sustain a richly valued yuan than to hitch it to gold, as it has done over the past year. A richly valued yuan by definition makes commodities cheaper for China.
By adding value to these commodities – like refining oil or cobalt – it will also be able to satisfy the needs of other developing countries. If things play out in anything like the way I’ve sketched, the U.S. at least in the short term will get what it wants, that is, a lower dollar that will boost U.S. exports and reduce imports. China will run some short-term risks as its exports will likely fall with the rising value of the yuan. But given sustained rapid growth in the developing world, the fall-off in exports may not be that much.
But longer term, the risks to the U.S. grow as it becomes increasingly dependent on other countries, and developing countries in particular, for many critical commodities that a falling dollar makes more expensive. We could end up being sorry for what we wished for.
Buy Gold Big Because It’s Going To $20,000
So far in my predictions about China, the oil contract, and gold, I think I’ve been largely on target. I found a reference to someone making fun of me for bringing up the topic of a gold-backed petro-yuan six years ago. But even if I get the broad outlines right, there will be a lot of twists and turns on the way to $20,000 gold, and there will be plenty of things I’ll miss. I hadn’t foreseen that China, probably by virtue of its massive hoard of gold, would be able to hold the yuan constant against gold.
But if many details will emerge only over time, I continue to believe my main point will hold true: China will want gold priced in a basket of currencies, or currencies and commodities, rather than in the dollar, with the yuan staying constant relative to that basket. That long with commodity scarcities will propel gold far higher. And, if I’m totally wrong, and the world goes completely sideways, you won’t need me to tell you to buy gold and buy it big.”
Legend Pierre Lassonde
Eric King: “Ivan, days ago KWN posted an interview I did with a legend in the mining business, my good friend, Pierre Lassonde, that took place right at the end of 2015 — the end of the brutal 5+ year bear market in gold. It was fascinating for KWN readers around the world to read what Pierre said that the ‘super wealthy’ were doing with their money right at the bottom. They were literally making massive investments, with individual families investing $30 – $40 million at a time into the beat down mining stocks. As you well know, shortly after that the HUI Gold Mining Index skyrocketed 185% in a matter of months. We face a similar market today, where many investors are frightened, just like they were at the 2015 bottom.”
What Do You Do At A Bottom?
Ivan Bebek, CEO of Auryn Resources: “Eric, what do you do at a bottom? You question your judgement and your existence. You also look at ways of saving money instead of spending money. But I also know what a bull market looks like, and as this bull market takes off, there will be little to no stock for sale and the quality mining stocks will trade at ridiculously high valuations, which is the polar opposite of what we are seeing today.
Success In The Brutal Bear Market
I remember the bear market in gold very well, but did you know that the biggest success we had was in 2014, when conditions in the market were far worse than they are today? That’s when we sold Cayden Resources to Agnico Eagle. And right now in this tough market there is no other junior in the world that has 420 kilometers of greenstone belts, which Auryn Resources possesses, that are known to host some of the highest grade gold deposits in the world that are being mined.
The World’s Next Major Gold Discovery
All of the reasons that Auryn traded up to $4.15 Canadian have not gone away. In fact, the fundamentals for us now are much stronger and we firmly believe that 2018 is going to be the year that we reveal the world’s next major gold discovery. And, Eric, smart money investors and the ‘super wealthy,’ as Pierre described them, are realizing there are now three additional factors that are going to turbocharge our share price higher this year, which is why we were able to raise money recently without issuing any dilutive warrants.
The Top Junior Gold Explorer In The World
The bottom line is we firmly believe that Auryn Resources will be viewed as the top junior gold explorer in the world by the end of this year. That is why this is the time when investors should be aggressively buying shares of AUG. Otherwise, like every great stock, they will look back and wonder, ‘Why didn’t I buy a large position in that company before the share price skyrocketed?’ Well, here is the chance for investors to buy shares of a company ahead of that massive surge in its share price.” For those of you who have yet acquired a stake in this high-quality company, now is the time. Auryn Resources stock symbol AUG in Canada & the US.
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