China-US Rivalry and Gold / Commodities / Gold & Silver 2019

It’sunimaginable what great progress China made in the last forty years. The riseof such economic power triggered many fears (or hopes) about the futureinternational order. We invite you to read our today’s article about therivalry between China and the US and find whether the Red Dragon will replaceAmerica as a global hegemon. And what would such a shift mean for the goldmarket.

The economicgrowth of China raises many worries. While some people fear theslowdown or stagnation in the Middle Kingdom, others claim that China will turn the existing international worldupside down.

You see, sincethe end of the World War II, the US has been the most powerful country in theworld. The Soviet Union rivaled, but it was too weak, and collapsed eventually. The global hegemony of the US becametotal then.

However, China,which is now the biggest or the second biggest economy in the world, wants tochallenge this order. Some experts even claim that the world enters the so-called Thucydides’ trap, i.e. the situationwhere the growing contender thinks that its position does not reflect itsstrength and that the old hegemon limits his development. When we add that arising power causes fear in an established power, we get the recipe for a war.In 12 out of 16 historical cases of Thucydides’ Trap, the result was war, asthe table below shows.

Table 1: Thucydides’Trap Cases (source: belfercenter.org)

Of course,Russia also challenges the US hegemony, but the country is economically tooweak. But China is different. Just oneof its province has bigger GDP than Russia. And the Chinese have really ambitious plans. Theywant to create a New Silk Road, i.e. a trade route running through the Eurasianland, as an alternative to the sea routes, which are still controlled by theUS. And – as gold bulls often repeat – China tries to weaken the dominantposition of the US dollar and strengthen the yuan.

The geopolitical analyses are fascinating, but they have severalflaws. First of all, there is a lot of determinism here. Geography does not determine the economic success or failure. Thecentral idea of geopolitics is that the country has to control trade routes toprosper and rise in power. But the wealth comes from effective production, notfrom controlling any particular geographical area. We did not live any longerin the Middle Ages, when there were few available trade routes, so those whocontrolled them had monopolistic rents.

Second, therising economic powerhouse does not have to intent to challenge the hegemon(and the war does not have to occur, as the table above clearly shows). Yousee, threat means a combination of capability and intentions. There is no doubtthat China has substantially built up its capabilities, but there are no evidence that the country’smilitary ambitions go substantively beyond Taiwan. You see, it might be thecase that China does not want to dominate, but just to restore an equilibriumthat lasted throughout much of the recorded history.

China’s actualachievements are really admirable, but they prompted many analysts (andPentagon, which has to justify its funding requests) to overblow the country’sposition. Yes, China is a rising power, but – given the amount of US militaryspending and its worldwide network of allies – it is not a global geostrategicpeer equivalent in power to the latter country. The US spends on defense threeor four times more than China and it can rely on help of many countries allaround the world (have you heard about the Five Eyes?).Rightly or not, the US is considered to be a cool kid, while China is, well, akind of a surveillance country – it’ssoft power or ability to form alliances is, thus, much weaker (can you namejust two friends of China? North Korea does not count).

To be clear, weare not saying that there will be no conflicts at all. No, we are not thatnaïve to claim “the end of history”. China may test the hegemon, but it will bewise enough to do it far from his core interests, so as not to upset the US toomuch. We are still decades from China being strong enough to threaten the US.

What does it all mean for the gold market? Well, gold bulls should wake up and acknowledgethe reality. The Chinese yuan will not replace the greenback anytime soon, as it comprises about 1 percentof the total foreign exchange reserves held globally, still a tiny share. Investors should not buy gold counting onthat.

And China willnot replace the US as a global hegemon shortly. It’s not strong enough. Its economy is slowing down, actually. Thetrade disputes and the debt burden inhibit the growth. Given the need for ashift of the economy from export-led toward consumption-led model of growth andfor a careful navigating between the risk of excessive indebtedness anddeleveraging too much (which could lead to a significant slowdown), triggeringa military conflict with the global superpower seems to be the last thing theChinese leaders could wish for now.
So, don’t expect tectonic shifts in theinternational order and the resulting rally in the gold prices. However, we also have good news for the gold bulls. The yellow metal may shine evenwithout the Atomic Parousia (what it only needs are strong fundamentals andpositive market sentiment).

Surely, thecurrent Pax Americana is not set in stone and it may change. But, be carefulwhat you wish for; you just might get it!As for us, gold prices even at $10,000 would be a poor consolation if the worldfalls into nuclear winter.

Thank you.

If you enjoyed the above analysis and would you like to knowmore about the gold ETFs and their impact on gold price, we invite you to readthe April MarketOverview report. If you're interested in the detailed price analysis andprice projections with targets, we invite you to sign up for our Gold & SilverTrading Alerts . If you're not ready to subscribe at this time, we inviteyou to sign up for our goldnewsletter and stay up-to-date with our latest free articles. It's freeand you can unsubscribe anytime.

Arkadiusz Sieron
Sunshine Profits‘ MarketOverview Editor

Disclaimer

All essays, research and information found aboverepresent analyses and opinions of Przemyslaw Radomski, CFA and SunshineProfits' associates only. As such, it may prove wrong and be a subject tochange without notice. Opinions and analyses were based on data available toauthors of respective essays at the time of writing. Although the informationprovided above is based on careful research and sources that are believed to beaccurate, Przemyslaw Radomski, CFA and his associates do not guarantee theaccuracy or thoroughness of the data or information reported. The opinionspublished above are neither an offer nor a recommendation to purchase or sell anysecurities. Mr. Radomski is not a Registered Securities Advisor. By readingPrzemyslaw Radomski's, CFA reports you fully agree that he will not be heldresponsible or liable for any decisions you make regarding any informationprovided in these reports. Investing, trading and speculation in any financialmarkets may involve high risk of loss. Przemyslaw Radomski, CFA, SunshineProfits' employees and affiliates as well as members of their families may havea short or long position in any securities, including those mentioned in any ofthe reports or essays, and may make additional purchases and/or sales of thosesecurities without notice.

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.