Weekly reviews

China vs USA = Gold

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The world economy is slowing down, this fact is confirmed by the central banks of almost all leading countries of the world. Analysts of the largest investment banks and famous economists all unanimously claim that the world is on the verge of the new economic crisis! However, where exactly is this final line? What factors can push the global financial markets to cross this final line and plunge the economy into chaos? Is gold a safe haven for financial assets during economic shocks, and should you buy it right now?

FortFS Broker Analytical Department starts publishing a series of weekly economic reviews for you to find answers to all these questions. In our reviews, you will also be able to follow current changes within the global financial system and how it affects gold and the precious metals market, oil and global stock indices. Our reviews will be published weekly on Thursdays or Fridays.

So, the first quarter of 2019 began for financial markets with problems. The US government temporarily suspended its work, industrial production, both in the US and in the world, has decreased, Donald Trump’s trade wars shook the world and revealed fundamental contradictions in the interests of countries with export-import economies. Observing all these events, most analysts see the main reason for the global economy slowdown in the trade wars launched by the United States. However, in our opinion, we should not forget that the main driver of trade contradictions is China and it is China’s economy that can have a significant impact on how the global financial markets will behave this year.

To begin with, it should be noted that the main reason for the cooling of the Chinese economy at the end of 2018 and at the beginning of 2019 was the specific policy of the Chinese authorities aimed at restricting the acquisition of borrowed funds to the Chinese securities market. In fact, the inflow of cheap money to finance investments in the Chinese economy has declined significantly. In addition to this, the fight against illegal investment schemes and against the withdrawal of money from the country also contributed to a decrease in the total investments inflow in the Chinese economy. Following this policy, in order to stop the economic slowdown, the central bank of China introduced a special measures package to stimulate business inside the country. According to the instructions of the regulator, Chinese banks eased credit conditions for small and medium-sized businesses and granted commercial loans during the first quarter of 2019 almost twice as much as analysts had predicted. The Chinese government also announced a tax cut policy. Thus, we see China’s attempt to stimulate business development and prevent a further economic growth slowdown.

The fact of the mutual dependence and correlation of the Chinese economy with that of the USA, Europe, Asia, as well as the economies of the EM countries (Emerging Markets) is undeniable. This means that if China manages to reanimate its economic growth, this, in turn, will certainly support the world economy and suspend its gradual slide into the abyss. At least for a while. For gold, this is a bad scenario. The need for a yellow metal as a refuge in case of the currency and economic crises will decline, which will push the price down.

However, the success of China in dealing with the internal crisis will largely depend on the results of the trade negotiations with the USA as well as on the terms of the truce in this trade war.  According to statements by the US and China, negotiations are likely to be completed in April. In case negotiations results bring benefits to China, we can expect a positive development of the economic situation. But it should be noted that it will take at least 3 months before these positive changes become noticeable and start supporting the global economy. Gold is very sensitive to the positive perception of economic prospects by investors and, as a rule, quickly fades under the bright light of optimistic economic expectations.

In case of failure in the truce conditions, China may experience an acceleration of its economic recession and the same will happen with the economies of neighboring Asian countries. Failure to find alternative solutions in a short time, and China gets the prospect of a full-fledged banking system crisis. It is not difficult to imagine what can happen if the small and medium business of the Middle Kingdom will not be able to repay a huge amount of recently taken loans. In addition, let’s not forget about the fully ripe, multi-year bubble of mortgage lending within China. If only just a ghost of the financial crisis in China, and therefore in the neighboring countries of Southeast Asia will appear, gold will rapidly gain strength.

But do not forget about those who initiated the trade war and the negotiations!

In case a trade agreement with China will have a positive effect on the US economy, we can expect a resumption of the Fed rate hike policy, a stronger US dollar in a role of a world reserve currency and, as a direct result, a decline in gold prices denominated in US currency.

If the United States fails to defend its business interests and this becomes obvious, financial markets will start talking about the inefficiency of the Trump administration, the crisis of world trade, the impending recession in the US economy, the danger of the US dollar losing the role of reserve currency and all those fears which keep investors in suspense since 2008. This will be the finest hour for gold and its brilliance will become dazzling.

Thus, it becomes apparent, how accurate the balance of trade arrangements between the US and China should be so that both countries can solve their internal problems, and the global investment climate improves to stop the global economic slowdown.

Will the two great world economies manage to find a compromise? Would such a trade-off be cost-effective? How long will the truce last? What measures are the parties ready to take if they do not achieve the desired result? Answers to these questions will determine the course of the global economic and political development of the whole world in the coming years, and maybe more. We can confidently expect that the dynamics of gold prices will be an excellent indicator of how successfully the global economic system is reformatted.

In our next weekly review, we will analyze the impact of the US stock market on gold, and what gold can expect in the nearest days.