Looking at the two charts below it could be assumed that the virus and its consequences completely disappeared two months ago, at least according to US equity prices. US stocks continued to move toward all-time highs but the gold price is telling another story. Or is it perhaps the same story? Both stocks and gold are correlated to the idea or perception that governments and central banks will continue to stimulate the economy in the event of a crisis.
It certainly seems that a significantly larger involvement in the economy by governments is here to stay. The days of actual free markets, Reagan & Thatcher, and creative destructive will not return for a generation at least. Yet something else that Reagan and Thatcher presided over – a Cold War – could be returning sooner than many think, as US-Sino deteriorate to new lows.
The big, yet woefully underreported story of the last two weeks is the publication of a significant strategic document by the White House on the People’s Republic of China. The full document can be accessed here:
This policy document is the most explicit and detailed assessment of China by the US and marks a significant escalation in its rhetoric:
- “The United States rejects CCP [Chinese Communist Party] attempts at false equivalency between rule of law and rule by law; between counterterrorism and oppression; between representative governance and autocracy; and between market-based competition and state-directed mercantilism. The United States will continue to challenge Beijing’s propaganda and false narratives that distort the truth and attempt to demean American values and ideals…. The United States does not and will not accommodate Beijing’s actions that weaken a free, open, and rules-based international order. We will continue to refute the CCP’s narrative that the United States is in strategic retreat.”
What many have considered obvious for quite a while is now loud and clear in the open: the next battle between two political and economic ideologies has started. The West had hoped engagement with China (and Russia before it) would usher in a new era of trade and commerce under Western leadership, rules, norms and standards. Yet, instead what happened was the alleged abuse of such international norms and institutions such as the WTO and the WHO – as many in the West see it. The constant demonising of the West within China, the Hong Kong issue, the claims of copyright and IP infringement, constant hacking as well as the Chinese Covid response have all led to this critical policy document.
The below image from China in reference to the current race riots with the caption “beneath human rights” is another example of such behaviour. And the US has had enough. The Rubicon has been crossed.
While the mutual interdependence between the West and China is too intertwined at present, future separation would create a new, significant source of Great Power rivalry that has been missing from the world, and markets, since the collapse of the Soviet Union thirty years ago. Only this time, the potential foe for the West, China, is far stronger and more advanced than the USSR ever was.
The key current event in this situation to keep a close eye on is what happens in Hong Kong, and eventually Taiwan. This will show whether contemporary events are merely political peacocking for domestic consumption or a real shift in the dynamic of 21st power politics, and the immense economic consequences.
If the world really split once again into two opposing camps, both competing for influence explicitly and by proxy throughout the world then Gold, would of course, continue to strengthen. While ideology, culture, religion and nationhood may separate and divide the planet, fear for the future is a common human trait regardless of the above. And the historical way, throughout the planet’s history, to invest in times of geopolitical crises, has been to buy gold.
Perhaps this is all a little too soon and post the US election and the Covid calm down relations will once again normalise between the US and China. But it’s clear that the deglobalisation trend post-Covid will accelerate and national self-sufficiency will once again return. With this, and so many other issues between the US and China – as well as China and its neighbours – yet to be resolved, the geopolitical situation globally could become a tinder-box sooner than expected.
Stock markets zoom higher on nothing other than hope of more stimulus. Indeed, any stronger rebound in the economy than expected would mean that the Fed would have to ease expectations of further easing, and even consider raising rates from this emergency level. Such an economic rebound would trigger inflation expectations higher and make both the US more, not less, antagonistic toward each other as their respective domestic woes eased.
Thus, in multiple scenarios Gold will continue to have its place in many a portfolio both now and for the long term.
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.