Goldex Heartbeats: the end of globalisation?

Goldex Team

Editorial content

Last time around this column highlighted the two main categories of consequences in a potential post-COVID19 world: Increasing Governmental Interventionism and Decreasing Globalisation. Today, the latter is examined.

The post WWII settlement and the plethora of intra-governmental institutions that appeared then and thereafter were supposed to create an interdependence of peoples and nations through movement of people, trade, ideas and capital. This was the orthodoxy in the aftermath of the greatest war the planet had ever experienced.

Before Covid-19 this orthodoxy was already under threat. Nationalists across the world had risen to power arguing against the demise of the nation-state and the movement of jobs to cheaper countries. Trump’s election and Brexit were in part driven by this.

In a world where the world’s workplace is China, where India produces most of the world’s generic pharmaceutical drugs, where the West specialises in services and not goods, many are seeing the inherent dangers of interdependence in a time of crisis. The issue is two-fold; freer-markets and globalisation have created a dependence of the West on emerging markets for essential and life-saving products. In a post-Covid-19 world no government can ever delegate such essentials to “the market”. All countries will draw up their own lists of essentials, from ventilators to food-security, and ensure they are made, sourced as much as possible from within their own borders. For many items, this is will be impossible due to raw material issues. But for everything else expect a giant reorganisation of the global supply chain.

On the geopolitical front the consequences can already be seen. Questions such as “how can we have such a dependent relationship with China when we cannot trust their data or transparency and can see their propaganda blaming everyone but themselves?” are arising. Articles such as these are everywhere:

As the third article states, decreasing globalisation or “decoupling” from China is already beginning:

“Evidence came today in the form of two BBC reports, one of the U.K. government of Boris Johnson (who has COVID-19 now) saying there would be ramifications for China failing to share how they stopped the virus from spreading. One such punishment was getting rid of Huawei in their 5G program.

Over the weekend, the Daily Mail reported that the Johnson team doubted China’s SARS-CoV-2 infection count, which totals around 81,000, saying they were probably off by a factor of 40.”

It appears that China-bashing is the only common denominator within European geopolitical solidarity at present. As always, a crisis shows that European solidarity is just a mirage. The political row over Corona Bonds has exploded into a dangerous new phase that hints at new existential issues for the bloc, once again between North and South.

As seen with Germany and is medical equipment export ban, now rescinded, when it comes to the crunch European governments will always, indeed have to, look after their own citizens first. The current status quo in the European Union, without a democratic mandate to issue common debt is a conundrum that up until now, few have really pushed toward the extreme. The issue this time is that the South are united, and many pro-European voices are voicing displeasure and concern with the North’s attitude like never before.

In the end however, no German government would survive long pushing for European common debt. So instead, there will be some sort of fudge in order to stop the whole project from fatally suffering.

How will gold prices be affected?

The amount of geopolitical uncertainty now is reaching heights not seen since the 1930s. The East-West Nexus, the Petrodollar, the European Union’s direction are all under strain like no time before. Supply chains will change drastically, alliances will become less mutually independent as sovereign nation states look to become more dependent on themselves versus global trading. China will need to turn its model to a domestic demand model while many of the multinational manufacturing behemoths will be pressured by their host governments to bring back material sourcing and production within their borders. And of course, with this mercantilist fervour rhetoric and political danger will increase. Gold has been performing so well in the last 15 years largely because of central bank action and debt dynamics. The market has not yet realised the geopolitical ramifications of Covid-19 which could turn a benign, global trading planet into – once again – a world economy where nation states dominate economic activity with a far more powerful political component than now. This will only create more uncertainty and potential conflict, both of which should benefit the Gold price to the upside.

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Important disclaimer: this document is not an official research report and the views expressed in it are those of the authors. The authors are not registered research analysts and there is no assurance the trends mentioned will continue or that the forecasts discussed will be realised. Gold as a commodity is not a specified investment for the purpose of giving advice under the Financial Services and Markets Act 2000, therefore, this does not give rise to rights to claim compensation under the Financial Services Compensation Scheme.