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July 19, 2019

China Dumps Treasuries, Continues to Buy Gold

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.

I believe that this underpinning in the gold bullion markets is just one of the many reasons why we have seen such strength recently, and is why I believe that over the next few years we are going to continue to see higher and higher prices, retesting and inevitably breaking through the old highs. 

Courtesy of Nathan McDonald via Sprott Money 

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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