Prepare to Duck and Cover Amid the Growing U.S.-China Cold War

This is the week of headline risk. But not from the headlines getting all the attention.

Because the biggest Reality Gap this week is between Big Media’s obsession with short-term impact items like daily coronavirus numbers, poll numbers, and the occasional short-term earnings numbers on one hand.

And on the other, on the long-term concerns about China that traders are already starting to price in.

How do we know this? Last night, during Asia’s trading session, gold prices hit an all-time high in the spot (or cash) market of $1,920 per ounce.

Meanwhile, the dollar hit a two-year low.

You may not have heard much about either, but these two records being broken at the same time is no coincidence.

It’s not because of the coronavirus crisis, or the upcoming election.

It’s because of the quickly growing tensions with China. We’re already in a tech war and a trade war with the country, that much is clear.

But traders and investors are starting to grow worried about what else is coming in this new Cold War.

A Cold War that bleeds into a military, monetary, or financial war would wreak havoc on the dollar. Militarily, tensions are rising between the U.S. Navy and Chinese forces in the South China Sea.

On the monetary and financial side, there’s a lot the U.S. government could do to hurt China. Possibilities range from restricting U.S. investments in China, banning the transfer of U.S. technology not only to Huawei but also other Chinese companies, to the more drastic options of hurting the yuan or even withholding interest payments on or changing the face value of the $1.1 trillion in U.S. Treasury bonds held by China.

At the same time, the coronavirus crisis means we’re issuing more debt than ever. From April through June, the Treasury borrowed about $2.99 trillion.

Compare that to the $1.28 trillion we borrowed through all of 2019.

If we hit China through the trillions of dollars we owe them, they’re not going to keep buying our new debt.

It’s not clear who will blink first. In the worst-case scenario, China could dump all those Treasury bonds on the open market. This “nuclear option” would probably sink their economy, but it might do the same to us.

These are the kinds of long-term concerns that are keeping traders up at night now. They’re much more concerned about China than Big Media is. So they hedge by selling the dollar and buying gold.

And as a kicker – gold the market uncertainty meter – trades in U.S. dollars. So a lower dollar means a higher gold price.

The new Cold War with China is going to continue long after the coronavirus pandemic fades, and the economic repercussions may be as great or even greater. We’re going to have to keep an eye on those growing tensions, the dollar, and gold.

Gold and even more so, silver, may be over-bought in the short-term, but with this much uncertainty and tension, it’s no time to short just yet. Remember, markets can remain irrational far longer than our broker accounts can stay solvent.

I’m watching for an opportunity to short silver, but we’re not there yet.

Of course, we can’t let long-term concerns blind us to the short-term. And there are plenty of short-term headline items to keep an eye on this week:

  • The Federal Reserve’s interest rate-setting Federal Open Market Committee is meeting this week, and will announce any interest-rate changes on Wednesday.
  • Facebook Inc. (FB) just announced it is delaying its quarterly earnings report by a day, until Thursday after the market closes.
  • But that’s not the all for Facebook founder Mark Zuckerberg. On Wednesday he’ll be testifying at an anti-trust hearing before Congress, joined by the CEOs from the other Big Tech companies: Inc. (AMZN), Alphabet Inc. (GOOGL), and Apple Inc. (AAPL).
  • On Thursday after market’s close, those three Big Tech companies will all be reporting their earnings, too.
  • And on the same day, the government will release the GDP figures for second quarter. Traders will be hoping for any indication that the economic recovery will be V-shaped.

Great trading, stay safe out there and God bless you,

D. R.

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