Excerpt from John Mauldin mce-anchorGold Alternative In this...

Excerpt from John Mauldin
mce-anchorGold Alternative

In this publication’s 20+-year history, I think I probably wrote a letter specifically about China once a year or so, in addition to mentioning China in relation to other topics. Searching the old files, the word “China” appears at least once in almost half my letters—another indicator of its importance.

My January 2023 letter talked about the then-big news Xi Jinping was lifting the “Zero COVID” restrictions. I quoted a Gavekal report predicting China’s economy, along with its demand for resources, would bounce back once the new infection wave receded.

That was right on target; China is recovering, but many problems remain. I think Xi’s assertion of greater control over the economy—and suppression of entrepreneurial activity—will have deep long-term consequences (see below). But China has more immediate issues and effects on the world. That’s where our panel started.

My partner Ed D’Agostino, who was moderating, asked Lyric Hughes Hale to describe what is happening with the Chinese economy right now. Lyric is fluent in six languages, including Chinese and Japanese, and lived in both countries. She brought the Super Bowl to China in 1986. She is wired and knows China intimately. Her letter is excellent.

Here is part of Lyric’s comment from the transcript (which, by the way, is 19 full pages so I can only share some short clips).

“I think what we’re seeing right now is the end of Chinese exceptionalism, economic exceptionalism. I do believe that somehow communism and capitalism are incompatible. And right now, China was able to not do anything to reform many of its political institutions because just the growth rate was so quick, and the base was so low when they started out that it looked like a miracle that could go on forever.

“And then China, many people said, would exceed the growth of the United States. According to my calculations, it’s not even true demographically. By the end of this century, the United States could have a larger population than that of the People’s Republic of China.

“So what we’re seeing right now, all the problems that we’re seeing, I believe the economic decline is real. And the best way for investors to measure that, I think, right now is the price of gold. China is now the largest buyer of gold, and it’s not just at the retail level where they far exceeded Indian purchases, but it’s also at the governmental level. The rise in the price of gold to me is an inverse indicator of the problems with the Chinese economy…”

Louis Gave then jumped in with another explanation for Chinese gold buying. He thinks Chinese investors see the Western sanctions on Russia, don’t want to be next and are thus urgently trying to get out of dollar assets. Here’s Louis:

“One of the key priorities today of Chinese policymakers is to de-dollarize their trade, is to reduce their dependency on the US dollar. And this is much more for geostrategic reasons than economic reasons. I think in the past 15, 20 years, you have seen the US dollar weaponized time and time again to confront geopolitical rivals or problematic countries, whether... call them Iran, call them Venezuela, call them Sudan, call them Russia... And the US politicians have used the hammer of the US dollar to beat people up, and China doesn’t want to be on the other side of that hammer…
“For most of my career, gold was always said to be the anti-US dollar. It was always said that when the policy mix in the US is wrong, when monetary policy is too loose, when fiscal policy is too loose, that gets reflected in a stronger gold price and a weaker dollar vis-a-vis gold. So I was smiling to hear that now a weaker dollar, stronger gold is actually a reflection on China, much more so than on the US.

“I think if you’re Chinese and you look... if my choices are Vancouver real estate or gold because I don’t want to invest in China, maybe now gold makes more sense.”

If this is right, then Chinese gold buying isn’t so much about wanting gold but about not having any better alternatives. Emily de La Bruyère then said it’s even broader than that; China wants to reduce outside dependence on everything else, too.

“There was a point already about China’s effort to rid itself of dependence on the US dollar. That’s important because China’s industrial policy more generally hinges on ridding itself of dependence on other players, or at least shifting the relative balance of dependence so that China is relatively more independent in any product than its competitors, adversaries, or even partners, because that gives Beijing leverage.”

I found this darkly amusing in a way. We seem to be regressing back to the time when physical gold—“specie,” as they called it—was the measure of power. And this time it’s gold plus a bunch of modern gold equivalents like microchips.