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China, the Pandemic, and Gold

China, the Pandemic, and Gold

Financial expert, Stephen Leeb, explains China’s growing role in the global economy and how it has handled the current pandemic.

No one disputes that China’s rise this century has been spectacular. But some now claim that China’s best days are behind it as it confronts internal problems and an increasingly hostile U.S. determined to keep China in check, including by kneecapping its technology companies like Huawei.

Don’t believe it. China, along with the East overall, has handled the Covid-19 pandemic far better than the U.S. and the West have. You can debate the reasons. But the result is that China is positioned to move full steam ahead with longtime goals, with the U.S. in no shape to stop it. From my perspective as an investment adviser, this means that the single most essential investment to own is gold.

It’s revealing to look at the disparate ways China and the U.S. have responded to the economic hit from the pandemic. China is proceeding with its massive Belt and Road Initiative (BRI), which is fostering huge infrastructure creation in developing countries. That adds to infrastructure creation within China itself. With the pandemic under control, China has announced 2020 infrastructure expenditures within its own borders of around $1 trillion, a sum that forms part of $7 trillion in infrastructure spending planned for the next five years. Around $1.4 trillion of this spending will be dedicated to new technology – to the digital economy and to new energies – everything from EV charging stations to 5G to AI.  At the same time, the government is allocating massive sums to further reducing, and in fact eliminating, absolute poverty anywhere in China. Meanwhile, the U.S. is spending unheard-of amounts of money simply to try to keep the economy afloat as millions lose jobs and struggle to stay in their homes. 

Why will gold benefit? Infrastructure spending on the huge scale that China is fostering will lead to resource scarcities, which go hand in hand with higher gold prices. But in addition, China has made moves that suggest an accelerated timetable for a second longtime goal: a new monetary reserve system that will in large part shove aside the dollar – and that will be linked to gold.

The country is testing the first sovereign digital coin, which will completely replace paper money. As a digital currency, the amount in circulation will be easy to monitor. I expect the coin to be implicitly or explicitly backed by gold. China will use a variation of blockchain to manage it, with the system facilitating trade with other countries.

Very pertinent is that China’s gold trading is settled in physical gold, in contrast to the U.S. and London gold markets, where contracts are almost always rolled over. Loosely speaking our gold markets are largely for speculators while China’s are for investors. The point is that the Chinese along with some foreigners already have a ready way of exchanging yuan for gold – making it reasonable to see the yuan as already implicitly backed by gold. With the digital coin, that backing will be closer to being explicit.

It’s essential to realize that unlike past versions of a gold standard in which gold’s value was fixed, the new system will be designed to readily allow for growth and to allocate scarcities. Growth and scarcities are natural bedfellows in a world in which two trends will accelerate: faster-paced growth by the entire emerging world along with a transition to renewable resources. The yellow metal, which Westerners generally ignore, in time will be valued many times higher than today as it comes to back up much of international trade as well as internal currencies.

Gold already has seen sizable gains in recent months, but I expect it to soar to unprecedented heights as it enters a new phase of a gigantic bull move – one that eventually will bring gold prices to $20,000 an ounce or even substantially higher.

To read more from Stephen Leeb, check out his new book, China’s Rise and the New Age of Gold.
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China, the Pandemic, and Gold

Stephen Leeb is president of his own money management firm and editor of the investment newsletter The Complete Investor. He is the author of seven previous books that uncover underlying geopolitical trends and explain how investors can benefit from them.