Gold Bulls Must Love the Hong Kong Protests / Commodities / Gold & Silver 2019

It appears that the two steps forward, one stepbackwards approach of mainland China isn’t working as Hong Kong citizens areprotesting again. The increasingly violent protests have plunged Chinese-ruledHong Kong into its most serious crisis in decades, and the situation appears tobe getting worse every week. What does it imply for the gold market?

Hong Kongers Protest

On Monday, Hong Kong’s Airport Authority canceledflights as demonstrators poured into its main terminal. What is going on inHong Kong? The protests began over plans that would have allowed extraditionfrom Hong Kong to mainland China. Althoughthe bill was suspended, the protests continue,as people demand democratic reforms. The problem is that although Hong Kong– as a former British colony – still enjoys freedoms not seen in mainlandChina, they are on the decline. The protesters say that mainland China ismeddling in Hong Kong, citing examples such as legal rulings that havedisqualified pro-democracy legislators.

Another problem is that the Hong Kong’s leader iscurrently elected by a 1,200-member election committee, which is a mostlypro-Beijing body chosen by just 6 percent of eligible voters. And even thissham democracy could end in 28 years, when the period of a high degree ofautonomy under the principle of “one country, two systems” negotiated in a dealregulating the status of Hong Kong with the UK expires.

The protestspresents a serious challenge to mainland China. Mostpeople identify not as Chinese, but as Hong Kongers, while some young activistshave even called for Hong Kong’s independence from China, giving a realheadache for the Beijing government and adding to concerns about the future ofthe Red Dragon.

China SlowsDown

China faces not only political but also, or evenmainly, economic problems. The economicgrowth has recently slumped to its lowers level in nearly three decades. The trade war with the U.S. hit the GDP growth, but this is not the only problem.Another, and possibly the most important, is the exhausted debt-fueled growth.The China’s overall debt is enormous, accounting for about 15 percent ofthe total global debt.

As the chart below shows, the public debt (green line, left axis) is relativelylow, as it remains below 50 percent of the country’s GDP. However, thehousehold debt (blue line, left axis) has risen from 11 percent in 2006 to 49percent in 2017, or almost fivefold in one decade. While the corporate debt(red line, right axis) surged from already high level 97 to staggering level of157 percent. As a result, the total debt (purple line, right axis) is now above 250 percent, which isdisturbingly high for a developing country. And this number does not eventake all debt instruments into account!

Chart 1: Governmentdebt to GDP (green line, left axis, as %), household debt to GDP (blue line,left axis, as %), nonfinancial corporate debt to GDP (red line, right axis, as%) and total debt to GDP (purple line, right axis, as %) from 1950 to 2017

Thisdebt-fueled growth is clearly not sustainable. Last year,defaults by Chinese companies hit a record high, while Chinese consumersstarted to worry about the rising household debt levels and hold off theirspending.

Implicationsfor Gold

Dark clouds aregathering over China. The country is facing economic slowdown and it may fallinto the debt trap, which could hinder growth even more. The trade war with theStates adds to the pain. And now, Beijing has to also deal with civil unrest inHong Kong.

All thesedevelopments look fundamentally positive for the gold prices. China’sslowdown is already felt all around the world. German industrial production plunged 1.5 percent in June, thebiggest annual decline in nine years. The slump was caused mainly by a declinein sales of machine parts and cars to China and the Far East. The slowingglobal economy should add to recessionary fears and make the major centralbanks more eager to adopt fresh dovish measures. Gold should shine, then.

If you enjoyed the above analysis, we invite you tocheck out our other services. We provide detailed fundamental analyses of thegold market in our monthly Gold Market Overview reports andwe provide daily Gold & Silver Trading Alerts with clearbuy and sell signals. If you’re not ready to subscribe yet and are not on ourgold mailing list yet, we urge you to sign up. It’s free and if you don’t likeit, you can easily unsubscribe. Sign uptoday!

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.