China and U.S. heading for a cold war? What impact on gold?

Some observers feel that China may be looking to retaliate over recent U.S. political statements and moves and a recent Chinese poll suggests it and the U.S. may be moving towards a ‘cold war'. Such political uncertainties could have a positive impact on the gold price.

LONDON - 

Chinese and U.S relations are at a low ebb and continuing to deteriorate fast so it seems and an article in today's Sunday Times in London says many Chinese hawks are promoting a cold war.  Indeed things appear to have got so bad that military leaders in China are preparing for the possibility of a limited armed conflict, possibly over Taiwan or Korea, although this seems very unlikely.

China has always been unhappy with U.S. criticisms over its human rights record, but a number of recent diplomatic disagreements have escalated the feelings within China that it should be taking more action against the U.S. if only to show its displeasure. 

The Sunday Times report noted that just under 55% of Chinese questioned in a recent poll by a state-run newspaper felt that a cold war would break out between China and the U.S.  China has been beset by major criticisms from the U.S. on Taiwan, Tibet, internet freedom, global warming and trade - and most recently the U.S decision to sell $6.4 billion worth of arms to Taiwan may have really brought matters to a head.  Indeed some Chinese feel that the country should retaliate by selling arms to states hostile to the U.S. in return. 

Should matters deteriorate further one suspects that it will also not have escaped Chinese politicians' thoughts that their country may currently hold the whip hand with the U.S. in the economic sector.  While China has hereto relied on western exports for much of its trade, the past year has seen a sea change with exports falling because of the western financial crisis, but in part being replaced internally as more and more Chinese become part of a consumer society.  China's huge trade surpluses and foreign reserves give it a substantial cushion with which to ride out any ensuing economic battle between the two superpowers and while the U.S. may still be a richer and more technologically advanced society, its economy is perceived as weak, and China's dollar trillions in its reserves suggest that if it wishes  to, say, destabilise the dollar by switching an ever growing proportion of its reserves into other assets, including gold, it could do so relatively simply.

The first step in such a move, at least as far as gold is concerned, could be another announcement of a substantial increase in Chinese gold reserves.  It is assumed by most analysts now that China is putting the country's gold production - and China is the world no. 1 gold producer - into its reserves, but does not announce this externally until and unless it is politically expedient to do so.  An announcement of say a 500 tonne increase in reserves would give a revival fillip to the gold price and could knock the dollar.  If China were also to buy up the remaining IMF gold on sale, this would do likewise.  China has kept out of purchasing IMF gold so far as it has not felt the need given its own gold production, but to cock a political snook at the U.S. Administration it may perhaps re-enter this market given a gold price rise is seen as a de facto devaluation of the U.S. dollar and a declining dollar would be yet another inflation trigger to add to that created by the pumping of huge amounts of paper money into the U.S. domestic economy.  While inflation has yet to rear its head, most economists feel this is inevitable at some stage and an accelerated dollar fall would just bring the inevitable closer.

Of course selling a significant number of U.S. dollars for other assets than gold would also be effective in destabilising the dollar, but could be seen as a more direct attack on the greenback which may not appeal to the same extent, at least at this stage.  Buying gold is just a neat way of achieving the same effect, and given the small proportion of gold in China's reserves compared with the U.S. and major European nations, could be presented as a logical move.

While destabilising the dollar in this manner wouldn't in itself be a declaration of a cold war, it would serve as a warning shot across the bows to try and persuade the U.S. Administration to take an easier line on its dealings with China.  But the U.S.  may well not be prepared to do so.  President Obama has been almost treated with disdain by the Chinese and will feel the need to demonstrate that he is a strong leader by overtly standing up to their pressures.  This is not perhaps conducive to warding off tit-for-tat moves by the two countries' governments and relations may well get worse in the near future before they start to get better.  Ironically the Communist power may have found it easier to work with a far more right wing regime like that of President Bush, than with the current U.S. Administration.

A growing political and economic dispute between the U.S.  and China, coupled with all the other financial problems affecting the global community, could bring gold into focus again, particularly if the yellow metal is also seen as a real, or potential, economic weapon.  But, bear in mind also that severe U.S. dollar devaluation may not be in the best interests of the Chinese given that so much of the country's huge reserves are in U.S. dollar denominated assets.  Even so flexing its economic muscle could be attractive to China just to make a point.  When one has reserves in trillions of dollars, losing a little as a political bargaining point is no big deal.

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responses to this article

Lets hope the cold war stay cold. As long as the cold war stay cold, we can live with that. If the cold war turn ugly, the world may not survive. Can the US learn to live without able to call all the shots? I hope so because China has no intention of following orders. If push come . .more to shove, it can get very, very ugly. . .less by Ben Gee on February 07 2010, 15:00 Find this comment inappropriate? Report it

China..Yawn Let's see..the economies of California and New Jersey combined are greater than that of China. This is year 4047 according to the Chinese calendar.. maybe by year 5000 they'll have a decent economy and human rigts record. Lets be frank, the . .more weapons killing Americans in the Middle East have "China" stamped on them. Just ask any of the soldiers. When I see China on mortal shells it makes me sick that the U.S. Government and citizens still do business with these killers. Its sad that Americans fund a government that provides munitions to militants. Even sadder is the fact that China is pumping oil in Afghanistan and Iraq right now and these countries are guarded by Americans. We shouldn't shed U.S. lives to ensure oil makes its way to China. This administration is entirely inept and corrupt. . .less by John on February 07 2010, 17:56 Find this comment inappropriate? Report it

Gold / War We better hope China doesn't get pissed - because the end of the world could happen by Stonewall Jackson on February 07 2010, 17:58 Find this comment inappropriate? Report it

'Cold War' an inane metaphor China is already asserting regional hegemony in an economic bloc without using a military buildup. They aren't going to start a dollar devaluation crisis with $800B of them in their back pocket. Further, their yuan/dollar peg model would . .more have to be revisited or commodity input prices would swamp them. This is just a really dumb analysis. . .less by Walt Robertson on February 07 2010, 19:06 Find this comment inappropriate? Report it

No War Having tea with the Dalai Lama is just like daring the Chinese to invite Bin Whatzname to a state dinner. The arms deal though is nothing. If thy are really sore, they know which Washington lobbyiast to buy. by Alan on February 07 2010, 19:22 Find this comment inappropriate? Report it

response to China yawn The obvious reason for this atrocity you cite is America is a DEBTOR. The consequence of beng a debtor, is you have to pay your debts. China has no interest in accumulating trillions more worthless scrap paper. So they demand we pay in blood and . .more oil. So our boys die to pay China. Germany paid in Lumber, coal, and food after the treaty of versailles. America pays its debt in blood and oil. We DONT have any GOLD left. We can only temporarily cap the price with paper contracts. . .less by ralph on February 07 2010, 19:27 Find this comment inappropriate? Report it

Chinese want gold low. I think the opposite is happening. China wants gold lower to protect their dollar reserves. I would bet that China is telling the USA to get their economy in order and create a strong dollar again. And all those stupid bankers know how to . .more do is push gold down to make the dollar look better. Just look how wild gold trades in NY compared to the rest of the world. This is the whole derivatives scam in action. The paper gold derivatives are overwhelming the physical market; even though in reality gold should be selling for thousands more if all that was tallied was the physical above ground stuff. So instead of backing the dollar with some intrinsic value and banning dangerous trading forms, the US and the US population sell all their gold to the east. The Chinese can have a temporary strong dollar and weak gold to continue their long-term plan. This is the war.... . .less by Jeedi on February 07 2010, 19:56 Find this comment inappropriate? Report it

RE: Cold War Let them start the war. US is well prepared for that. And not since yesterday. They hold scrap paper. If they move against the US all their dollars serial number will be invalidated and unaccepted by US. They think that they have numbers, . .more a billion people strong. Numbers mean nothing against intelligence. 1 million fools won't solve any complex equations that 1 smart man can do. China has no innovation. For a country that invented wei-qi that is pitiful. . .less by Master on February 07 2010, 20:26 Find this comment inappropriate? Report it

chinese cold war Maybe chinese cold dumplings - they have got no balls to do it!! by jack king on February 07 2010, 23:03 Find this comment inappropriate? Report it

lost in the moral war China should sell weaponry to all the US's foes, and still hold the moral ground. I bet sooner or later the US will get hit by a nuclear bomb which is not missile carried but human carried...the most vulnerable country in the world is the US, not . .more the ones in Africa because the people in US do not have any dangerous sense in making foes...the US's collapse is inevitable as its politician are easily kidnapped by their stupid supporters.... . .less by Anti-bias on February 08 2010, 03:25 Find this comment inappropriate? Report it

Fiat Currency and Deceit. Current administration and the like, tearing the American Spirit and weakening the fabric that made the U.S. great, shows the rest of the world the secrets to flexing their strong arm and take down a power that has been deceitful and cunning. Wars . .more from the past may have ended, but, THEY ARE NOT OVER. Retaliation opens the door to past conflicts and resumes the fight. Time and knowledge to strengthen the arms to win. . .less by R.Aspenwall on February 08 2010, 06:00 Find this comment inappropriate? Report it

uscrushed us suckz china's azz and china can destroy usa easily chia's econmy isfar more greater then usa... usa is begger compared 2 china thats why obama visited china lastyear to beg favours from great chinese.......all b0wd0wn 2 china; by 0sama-ladin on February 08 2010, 07:35 Find this comment inappropriate? Report it

US China relations The global economy was being pedaled by the US (we buy goods on credit) and China (we make goods and accept US paper). US credit economy stops, bicycle wants to fall over. It is in everyone's global economic interest for the US-China dynamic to . .more return to positive and stay there. More ideas about how this might come about would be helpful in this discussion. What is Obama's best approach? Anyone who has been in a bad marriage/divorce knows that negative tit-for-tat can too easily lead to ruin. . .less by Eric Best on February 08 2010, 09:02 Find this comment inappropriate? Report it

No War No War -Just journalist playing USA doesn't need any help. Strong Dollar doing fine without outside help. USA seem to be doing a fine. No war needed. USA economy is mending. China always willing to assist any way she can. China just want prosperous happy USA so world can stay . .more safe. China not need weapons in neighbourhood just like Kennedy not like missile in Cuba. We same as american. Just feel exacly the same way. We can make paper money work so Gold or paper make no different. If you want Gold we can make Gold if you want paper we can make paper. We do it becase China can do it. . .less by Xi Ling on February 08 2010, 15:22 Find this comment inappropriate? Report it

No War Barring mishaps due to the work of various mischief makers, the US and China ought to be great friends. Americans are remembered for CocaCola, other Westerners, opium. by Alan on February 08 2010, 19:09 Find this comment inappropriate? Report it

War let the war begin, n Africa benefit by Bgo on February 15 2010, 07:00 Find this comment inappropriate? Report it

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