Is gold the ultimate weapon in a financial war? - CrossBorder Capital
The world has seen hot wars, cold wars, trade wars and currency wars and now the U.S. in a bid to retain its dominance in financial markets is embarking on a capital war with China, according to one researcher.
In an interview with Kitco News, Michael Howell, managing director at CrossBorder Capital and author of his new book Capital Wars, warned investors that they can expect to see higher volatility over the years as China challenges the U.S. reserve currency status.
"We've seen many examples over the years, over the decades of transitions between dominant currency zones, whether it be from Sterling to the U.S. dollar,” he said. “These transitions tend to be quite volatile and challenging for financial markets."
Howell said that in this transition, the world is being carved into regions: a U.S. dollar zone and a nascent Chinese yuan zone. He added that market conditions have been exacerbated because of the COVID-19 pandemic. Central banks and governments around the world have been pumping liquidity into financial markets to support the global economy that has been devastated by the coronavirus.
Howell added that the fight for global financial dominance could happen even sooner than some are expecting because of the economic conditions. He said that if asked at the start of the year, he would have predicted China's dominance in 10 years; now, it might be within five years.
"It will not be overnight, but you know, journeys begin with one step," he said.
Another factor, Howell said, in speeding up the capital wars is the low interest rate environment. In its effort to support the U.S. economy, the Federal Reserve dropped interest rates to a zero-bound target.
Howell explained that the low interest rate environment for the last 10 years and the latest cuts is encouraging the rapid growth of private sector debt. Massive amounts of liquidity will be needed in future years to allow companies to service their debts.
Howell said he sees gold prices rallying higher in the coming years in reaction to central banks being forced to add more liquidity to markets. He added that holding gold will be "paramount" for investors.
"If you want to diversify your currencies outside of the U.S. dollar, how can you really do that? There's not the depth in other markets. And therefore, gold must be the alternative asset," he said. "Gold is going up, we think by quite a lot."
Looking at gold prices, Howell said that he could see prices double or triple from current market levels to meet the growing debt concerns.