Trade Wars Go Main Street, Uncertainty Increases, Precious Metals Rally - Nathan McDonald (May 22, 2020)

May 22, 2020

In last week's article, I highlighted the fact that the trade wars between the United States and China were back in full force, with President Trump taking action against Huawei Technologies, a company that has been at the center of the trade wars since they began.

The move by President Trump—blocking a shipment of semiconductors to Huawei Technologies from global chipmakers—unsurprisingly infuriated Chinese officials and was followed up by harsh rhetoric from both sides.

Perhaps this move was political, as the November 2020 Presidential election is rapidly approaching and recent polls have indicated that Americans on both the left and right side of the spectrum are united in one front: their growing resentment towards China for their initial handling of the coronavirus crisis and apparent lack of shared information.

(Chart source, Pew Research)

Whether or not this resentment is founded is up for debate. However, this does not change the fact that it is there and it is growing rapidly.

As seen from the chart above, approximately two thirds of Americans now have a negative view of China, which is the highest number since polling began in 2005.

(Chart source, Pew Research)

Many at first would dismiss this as a partisan issue. However, as previously indicated, the resentment is shared by both Democrats and Republicans, with the latter tending to be more negative than the former, which is of course to be expected.

Growing Resentment to Affect Spending Habits

Further indication that the trade wars are going nowhere anytime soon—and are likely to be a favorable talking point heading into the 2020 elections—was another recent poll, which indicates that resentment towards China will very likely impact consumers’ spending habits moving forward.

A recent poll conducted by Bloomberg indicates that a growing number of Americans—currently 40%—would be willing to spend more on products if they were made outside of China:

(Chart source, Bloomberg)

Bloomberg's poll also discovered the following:

• 55% don’t think China can be trusted to follow through on its trade-deal commitments signed in January to buy more U.S. products
• 78% percent said they’d be willing to pay more for products if the company that made them moved manufacturing out of China
• 66% said they favor raising import restrictions over the pursuit of free-trade deals as a better way to boost the U.S. economy

This growing trend is likely creating great uncertainty within the Chinese government given that a large percentage of their economy relies on exporting Chinese-made goods to the United States. A shift in spending habits, even minor, could have dire consequences.

This situation is only going to get worse the longer this resentment remains, as it will force many U.S. businesses that manufacturer their goods in China to shift production elsewhere, whether that be the United States or another country.

This will have a direct impact on the bottom line of many companies, hurting them in the short-to-medium term.

Resumption of the Cold War? Safe Haven Assets Rally

The markets hate uncertainty, and that is exactly what we have at the moment.

With the ongoing threat of COVID-19 and the intensifying U.S.-China trade wars, it is no surprise to see precious metals rally once again.

(Chart source, goldprice.org)

Both gold and silver bullion have headed higher over the past week, with silver bullion experiencing a sharp rise in price, rallying strongly into the $17 USD plus territory.

Although we have not hit "Cold War" status yet, we have undoubtedly entered into a period of "freezing over" now that both the sitting President and the general public are solidly aligned in their resentment towards the Chinese government.

The true risk is yet unknown, however, as it is anyone’s best guess how this all unfolds.

How will China respond? And will resentment among their population against the United States grow in tandem?

Things are likely to get a whole lot worse before they get any better.

Uncertainty is plentiful, and supply is nowhere near running out.

Stay safe and keep stacking.