Trade War May Pressure New Bottom in Gold

President Trump's escalating trade war appears to be affecting gold prices, which respond to a stronger dollar.  The tariffs will make Chinese goods more expensive, but the Chinese can make their goods cheaper by making their currency cheaper to offset the effects of the tariffs.  There are many ways the Chinese can do this:  The yuan is pegged to the dollar, so they can lower the peg.  This is easy to do because the Chinese owe at least a trillion dollars in loans to the US, and they hold trillions in dollars and dollar-denominated loans that they’ve made to the US government. If they purchase dollars, the dollar will strengthen, and Chinese goods will become cheaper, offsetting the tariffs.  

In turn, the price of gold is affected by the dollar. A stronger dollar means cheaper gold. That correlation has held this week. 

In light of today’s White House threats of an additional $200 billion in tariffs,  the S&P 500 fell almost one percent and gold fell back to $1244, a fall of about $10.  The yuan renminbi-to-dollar exchange rate has fallen over the past couple of days to $0.1497, the lowest level this year.   

 It will be seen whether gold can hold a technical $1240 inflection point.  If not, there may be a good way down as the Sino-American trade-and-currency war escalates. That might provide a good entry point for gold, perhaps below the $1,000 mark.

Hope is not prediction, though.

Increasing Likelihood of Chinese Debt Crisis

 One of the effects of the new tariffs is that China may default on its heavy debt load. Chinese provinces and businesses owe more than twice what the heavily indebted US federal government owes as a percentage of GDP (105% to 256%). Much of that debt is denominated in dollars, so if they cannot trade with the US, they may not be able to pay it back because they will be unable to obtain the dollars. In this article Reuters reports that a firm in Inner Mongolia has defaulted on $629 million in "off-balance sheet loans." It's unclear whether the current crackdown by the Chinese federal government on provincial debt is related to the Trump tariffs, and it's far from certain that a general credit crisis looms in China. They are moving in that direction, though.

If China defaults, that will cause financial troubles here in the US because China owes much of the money to US lenders--more than $1 trillion according to Investopedia.