The trade war with China continues on with seemingly no end in
sight.
Tensions remain high, with neither party willing to back down from
the fight and unfortunately, for many parties involved, it appears that the
thought of a quick resolution has long ago been cast aside.
President Trump cannot and will not back down from this
fight.
In his eyes, and those who support him, his hard headed attitude
has won him a number of concessions in recent trade war bouts, even if it has
come at a cost to certain companies and individuals, and he is not going to
change his "winning" formula.
U.S. farmers have taken the brunt of the damage domestically,
having to be bailed out by the United States government repeatedly.
Iowa farmers, who have taken tremendous losses, just recently
received
approximately
$1 billion in relief funds that is intended to help them mitigate some of the
damage these ongoing disputes have caused.
The pain and suffering are likely to continue on for years to
come, and thus, you can expect the
bailouts for U.S.
farmers hit the hardest to continue on as well, until they can appropriately
adjust their business models to the new economic reality they find themselves
in.
However, who has been hit the most is undoubtedly China, as
businesses have been migrating their factories and thus production to the
country for countless years, ballooning and swelling their economy, resulting
in staggering economic growth.
Yet, this is starting to change, as businesses who have off-shored
their production are also starting to feel the pinch of President Trump’s
roughly $250 billion worth of tariffs, and are starting to make the required
changes to circumvent these new taxes.
This is resulting in some companies redesigning their products to
get around tariff laws, mislabeling items for example, or even outright moving
production out of the country entirely.
Global
News
reports;
"Consider Xcel Brands, a New York-based company that owns such brands as Halston, Isaac Mizrahi and C. Wonder. Two years ago, it made all its clothing in China.
Now it’s on the move — diversifying production to Vietnam, Cambodia, Bangladesh and Canada, and considering Mexico and Central America as well. By next year, it expects to have left China completely."
These trade wars are undoubtedly one of the major reasons why China's GDP has continued to tick lower, albeit still at an enviously high growth rate of 6.2%.
Upon learning of this slowdown, President Trump took to twitter to claim victory, however preemptive
it may be:
“China’s 2nd Quarter growth is the slowest it has been in more than 27 years. The United States tariffs are having a major effect on companies wanting to leave China for non-tariffed countries. Thousands of companies are leaving.This is why China wants to make a deal with the U.S., and wishes it had not broken the original deal in the first place. In the meantime, we are receiving billions of dollars in tariffs from China, with possibly much more to come. These tariffs are paid for by China devaluing & pumping, not by the U.S. taxpayer!”
Still, if you think that China is going to take this lying down,
and that there are not going to be consequences, then you would be horribly
mistaken.
China continues to play the long game, knowing that they
ultimately are going to hurt the most throughout these trade wars as they have
built an entire economy on supplying goods to both the United States and
Europe, the latter of which is also
slowing
down
their
demand for Chinese goods.
This puts China between a rock and a hard place, and the best
weapon they have is debt.
China has accumulated a monstrous amount of U.S. Treasuries over
the years, assisting greatly in the rapid accumulation of U.S. national debt,
which
now stands at a staggering $22 trillion and
growing.
Choosing to punch back, China has been dumping some of the U.S.
Treasuries that they have accumulated throughout the years, accelerating their
deleveraging with each passing month.
In April alone, China shed $7.5 billion in Treasuries, according
to the U.S. Treasury Department, bringing their total holdings down to $1.1
trillion.
However, this is just what we know, as China is notorious for not
disclosing all of their financial information, shrouding much of what they do
in mystery and funneling funds through alternative routes.
While at the same time, China has been very open about where they
prefer to park some of these newly liquidated funds, gold bullion.
Increasing their holdings for seven
straight months
,
China added another hefty purchase to their gold reserves in June by 10.3
tons.
This results in an increase of 74 tons over the same period of
time, proving that this is not a "one off" and that they are dead
serious on their long-term strategy of dollar deleveraging and gold
accumulation.
Regardless of whether or not the trade wars continue on for the
foreseeable future, I believe that there is no going back from this strategy and
that China, along with other countries such as Russia, are going to continue to
shed U.S. dollars and buy gold.
This is going to create a floor in the physical price of gold,
eventually overwhelming the fiat paper gold markets that are horrendously over-leveraged,
and thus, destined to implode as physical demand becomes too much for it to
bear.
Courtesy of Nathan McDonald via Sprott Money
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