Resource World Magazine

70 www.resourceworld.com O C T O B E R / N O V E M B E R 2 0 1 9 Epilogue by David Duval F or traders and investors, owning commodity stocks can be a brutal exercise – not to mention an ongo- ing lesson in humility. Beaten down gold investors have been understandably skittish about buying into any bullish scenario for gold after so many disappointments. Most have lost track of the numerous false starts in recent years, when the gold price looked ready to recover only to fall after a brief rally. Gold mining stocks hardly fared better and in fact performed much worse than the physi- cal metal which is hardly without historic precedence. With the price of gold at multi-year highs, investors are once again asking if the rally is sustainable not to mention what the future holds for gold mining stocks whose share prices are heavily leveraged to the physical metal. However, this time looks very differ- ent from the past, in my opinion. While most gold bugs expected Trump's elec- tion to boost gold prices sustainably, quite the opposite transpired: The US economy boomed – as did the stock market – and the US dollar strengthened which is nega- tive for gold. But there's trouble on the horizon of the trade war variety. Trump exhibited his protection- ist leanings on his first full day in office when he withdrew from the Trans-Pacific Partnership (TPP) – an ambitious trade agreement initially signed by 11 Pacific Rim nations, including Canada. Following the US withdrawal, it was abandoned and replaced by the Comprehensive and Progressive Agreement for Trans-Pacific Partnership or TPP11. At the time of signing, the 11 signatory countries' combined economies repre- sented 13.4% of the global gross domestic product or about US $13.5 trillion. The CPTPP is the third largest free-trade area in the world by GDP after the North American Free Trade Agreement and European Single Market. Unfortunately, the US is not a party to it. Things have only gotten worse since the failure of the TPP to be ratified. The US is now involved in a full-fledged trade war with China which will almost cer- tainly increase costs for US consumers. In addition, Chinese reciprocal tariffs are decimating segments of the United States' agricultural sector, including soybean growers and hog producers. Canada is also feeling the heat after arresting Meng Wanzhou, the chief financial officer of the Chinese company Huawei Technologies, at the request of the US. Apparently her arrest was linked to Huawei's alleged breach of American sanctions against Iran which the US is effectively forcing countries to adhere to. New Chinese retaliatory tariffs on US goods will cause global disruptions and force Canadians and others to defend their markets against heightened American competition, among them soybean, meat and chemical producers. With the world facing a calamitous trade war between two of the world's largest economies, it's becoming easier to understand the safe haven appeal of gold which is now trading at multi-year highs. In some currencies, including the Canadian Loonie, Aussie dollar and Euro, the metal is trading significantly higher. President Trump's ongoing criticism of Federal Reserve Chairman, Jerome Powell, and the latter's measured response to low- ering interest rates has rattled foreign exchange markets including the US dollar, diverting interest into gold which nor- mally trades inversely to the dollar. The dollar has been the world's reserve currency since 1944, affording the US great privileges, including an overpriced currency relative to its fundamentals and the ability to borrow large sums of money cheaply. Countries including China are starting to push back, with the Chinese launching a yuan-denominated oil con- tract last year that was well received. Due to fears that the US would attempt to use the dollar as a political weapon, Russia has developed an alternative to SWIFT, the global system to estab- lish common processes and standards for financial transactions. China has also inau- gurated its own International Payments System which Russian banks have signed on to. The net effect is reduced demand for US dollars. China's strategy alone poses an existen- tial threat to the dollar's reserve status and its relative strength in global finance. In actual fact, the United States can ill afford any threats to its dollar due to its need to borrow nearly $10 trillion over the next decade to feed the country's spending addiction. One of the most stunning denunciations of the dollar came recently at an economic conference in Jackson Hole, Wyoming when outgoing Bank of England gov - ernor, Mark Carney, described why the dollar's 'destabilizing' reserve status role in the world economy has to end. He also suggested that central banks could create their own replacement reserve currency, one potentially tied to Facebook's new 'sta- blecoin ' Libra, or some other 'Synthetic Hegemonic Currency. ' If there ever was a reason to buy gold, a statement like that from one of the world's preeminent bankers would be it. n Dollar's declining status as global reserve currency spells better days for gold

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