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Brace for major market correction should China-U.S. conflict become 'real'

Kitco News

As China closed down a U.S. consulate in Chengdu last week, everyone is watching rising geopolitical tensions between the world’s two largest economies.

Steve Hanke, professor of applied economics at Johns Hopkins University, said that relations between the U.S. and China are not going to improve in the short-term.

“Things are not about to get better between China and the U.S. any time soon. I don’t see any clever diplomats working the street that could calm that down, so we can expect some bad news events leading to significant market corrections even though we’re in an up market in equities,” Hanke said.

The fundamental force behind a drift in relations is a difference in ideologies, Hanke said.

“It’s real and it’s ramping up,” he said. “The idea of [a real conflict] has been around for a while. Number one, you’ve got a communist regime…it’s not a capitalist, private property system, it’s still politically a communist system, so that’s one thing. And then you’ve got key advisors in the White House that are important, Peter Navarro for one, that are always taking the position that China is basically ripping off the rest of the world, stealing their intellectual property, and basically confiscate lands in the South China Sea that are not Chinese by any stretch of the imagination,” he said.

A ramping of tensions has also prompted the White House to consider the de-dollarization of the Hong Kong currency board.

“The U.S. was considering cutting off the access to dollars in the Hong Kong currency board, as well as Hong Kong banks. Fortunately, that didn’t happen. I had advised strongly that this would be a disaster for the U.S. dollar because Hong Kong, since 1983, has had a currency board system. The Hong Kong dollar exists by it’s backed 100% by U.S. dollar reserves. It trades at a fixed exchange rate to the U.S. dollar, 7.75 Hong Kong dollars to the U.S., so the Hong Kong dollar is a clone of the U.S. dollar,” he said.

The gold price rally has been largely driven by a decline in the U.S. dollar, which has been driven down by a long series of economic sanctions placed by the U.S., Hanke said.

“They were considering it, but they did not do that. The other thing is that, more broadly speaking, sanctions have been something that’s been used broadly since 9/11 by George W. Bush, by the Obama Administration, and certainly by Trump,” he said. “This kind of undermines the dollar’s credibility and the dollar’s stance, and I think that’s one reason the dollar has been getting a little bit weaker, but more importantly for Kitco people, that’s another reason that gold has been making new highs.”

Disclaimer: The views expressed in this article are those of the author and may not reflect those of Kitco Metals Inc. The author has made every effort to ensure accuracy of information provided; however, neither Kitco Metals Inc. nor the author can guarantee such accuracy. This article is strictly for informational purposes only. It is not a solicitation to make any exchange in commodities, securities or other financial instruments. Kitco Metals Inc. and the author of this article do not accept culpability for losses and/ or damages arising from the use of this publication.