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01 Nov 2018 | By Ned Naylor-Leyland

Trade Wars and Gold

Weighing what US trade wars mean for gold

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The US trade wars that have dominated headlines in 2018 are a symptom of an international monetary system that is in desperate need of reform. With the dollar still seen by the US as “our currency, your problem,” China has gone ahead and developed its own regional trade initiatives and is launching its currency into global markets. This, in my view, lies behind much of the hot rhetoric, sanctions and tariffs.

Ever since former US President Richard Nixon defaulted on the US dollar-for-gold arrangement in the 1970s, which led to the demise of the Bretton Woods system and firmly positioned the greenback as the world’s international reserve currency, discontent has slowly been gathering momentum.

No longer is the “exorbitant privilege” of the US dollar sitting at the heart of the financial system deemed acceptable and economic powers from China to the European Union are signalling either via their words or their actions that change is afoot.

This is where gold has the potential to once again play an important role as apolitical money.

We have seen ructions in the petrodollar arrangement accelerate and the political rhetoric get louder and more direct. China and Russia’s 30-year gas deal signed in 2014, for example, is a clear rebuttal of the system that has propped up the dollar ever since it was established in the 1970s.

This year, the Russians have continued to buy gold and sell US Treasuries.

Their rapid accumulation of the precious metal since 2014 is supportive of the thesis that Russia has been converting yuan gas receipts into gold on the Shanghai Gold Exchange, in part to shield itself from the effects of the more tempestuous new world order. If true that the exchange facility is already functioning, this signals a return to an era where gold settled international trade, rather than US dollars or military might.

Other political rumblings elsewhere in the world are also potentially supportive of the yellow metal.

Turkey has said that loans from the International Monetary Fund need to be repaid in gold rather than US dollars and Germany as recently as August called for a new global payment system. Perhaps most significant of all, Marty Selmayr, the Secretary General of the EU Commission, has been tweeting about the need for and history of structural monetary change.

This year we have watched the relationship between the US dollar/yuan and yuan/gold with great interest. A soft currency peg has appeared ever since the US slapped China with higher trade tariffs. This may have been a coincidence or it could have been a genuine move by the Chinese to use gold as a way of stabilising and internationalising their currency, draining the West of its remaining physical gold reserves in the interim. While the price of gold in US dollar terms tumbled in first

half of 2018, realpolitik and the macro economic backdrop should suggest that people stay invested.

Time will tell, but one thing is for sure, trade wars are about a lot more than tariffs.

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