China and Gold

 

It's no secret that China is driving the global gold price right now.  The central bank and sovereign wealth fund buying is global but China is the driver.  They have set up gold exchanges and warehouses strategically throughout the world; they have been selling US treasuries to buy gold and they have started to accept gold in payment rather than US dollars for certain strategic commodities.

In fact, the narrowing of the US trade deficit over the last 5 months is entirely due to the US exporting gold to China.

So what happens if to the gold price if China collapses, as many in the US are predicting?

It's a fair question, even though many of the US analysts who are predicting the collapse of China like Ed Dowd are also some of gold's biggest proponents.

The major argument for China's collapse is based on demographics.  The argument goes that the Chinese birth rate is rapidly decreasing so that you have a diminishing worker base supporting an increasingly aging population.

What this argument misses is A) the massive population in china still produces 4 times the number of youthful workers that the US population (also decreasing) produces.  There are 80 million Chinese under the age of 5 and only 18 million Americans.

But what this argument also misses in the structure of the Chinese economy is such that the aging population doesn't nearly consume the percentage of the output that the aging US population consumes.  First, it is about 1/5 as expensive to live in China so that the savings of the aged last much longer there, without nearly the same amount of government support.  Second the Health Care is set up in such a way that the young are supported equally with the aged unlike here in the US where nearly 50 percent of the health care outlay supports procedures for the aged which respresent about 15 percent of the population.

But most important, the Chinese economy does not run on prerpetual negative real rates which is a constant transfer of wealth from young to old, from worker to asset owner as it is here in the US economy.

Also, whereas the Chinese economy socializes the profits of the wealthy which benefits the younger workers, the US economy socializes the losses of the very wealthy which penalizes youthful workers.

This makes the Chinese economy more resilient for the youthful workers than many in the US seem to realize.  

The second criticsim of China has to do with the inefficiency of the central government which resulted in an overbuilding of the housing sector to such an extent that collapse is imminent.

This argument is generally put forth by analysts who have never been to China.  Those western analysts who live in the Far East like Mark Faber and Louis Gave tend to point out that the Chinese Central Committee has shifted away from putting resources into housing (for nearly a decade now)  towards building extremely efficient hi tech industries like Electric Cars, AI, robotics and aerospace that are at least competitive with western industry and in some cases superior.

Finally the Chinese have managed to stay away from perpetual forerver wars that eat trillions of dollars of resouces in completely unproductive endeavor and they have spent money rather on buying up the commodity minings and processing sectors around the globe.  In this way that have already achieved escalation dominance for commodities like Rare Earths and Silver that are crucial to the new hi tech industries.

This isn't to say China is in any way superior to the US, but I don't think there's any good  reason to feel the Chinese collapse is imminent.