With the rest of the world distracted by the holidays, China’s leaders met this month at a secretive three-day Communist Party conference. Their mission: try and find solutions for the mounting financial risks that threaten to take the country under in 2017.
There’s no longer any doubt about it: China’s economy is hitting a brick wall.
Not only are its own internal economic trends increasingly bleak, but optimism is surging across the world over the possible future of the U.S. economy under President-elect Trump. If China does collapse, the repercussions would impact markets worldwide for years and benefit holders of safe-haven assets such as gold and silver.
Current trends have President Xi Jinping and other senior party officials extremely concerned. Quarterly GDP growth in China has fallen steadily over the last six years, down 50% since 2010. Non-performing loans are up sharply over the same period, almost doubling since 2014. And foreign-exchange reserves are down 25% since 2014.
These and other troubling signals led S&P and Moody’s to cut China’s sovereign credit outlook to negative in March. Experts believe that the country has severe asset bubbles waiting to pop in the bond and property markets, leaving little room for it to maneuver with interest rate policy or other traditional measures.
No wonder China has named “stability” as their #1 economic goal for 2017. It will be a remarkably hard target to hit, especially in a year when the Communist Party also plans to shuffle all its top brass. Earlier this month, China was embarrassed to be caught off guard when President-elect Trump spoke directly with the president of Taiwan. This move broke age-old protocol and signaled a more aggressive political and economic stance towards China from the new president.
Trump has already publicly lambasted the country for uncompetitive behavior and alleged currency manipulation, pledging to boost tariffs on Chinese imports as soon as possible. As it is, our recent U.S. interest rate increase has given new life to the dollar, while the yuan has fallen to its weakest level in almost 9 years with no floor in sight.
NEW GORDON CHANG BOOK:
THE COMING COLLAPSE OF CHINA
Author Gordon Chang also believes that China, the world’s second-largest economy, is on the brink of collapse.
According to Chang, China’s leaders have long had the ability to defer crisis after crisis through propaganda and government obfuscation. In his book The Coming Collapse of China, he explains that the underlying imbalances in the Chinese economy keep getting bigger and a painful day of reckoning is coming. When China implodes, Chang believes gold could move higher quickly.
Legendary investor George Soros thinks that a hard landing for China is coming and the country will face a financial crisis similar to the U.S. in 2008. For him, the most obvious sign of growing financial stress in China is the country’s flagging position in the volatile currency markets. Some analysts argue that China is facing a steep depreciation in its currency, which can only lead to a financial crisis or an economic hard landing due to severe capital flow imbalances.
MCEWEN: $1,800 GOLD IN 2017
Chairman and Chief Owner of McEwen Mining Rob McEwen thinks Trump’s planned policies could well kick-start the U.S. economy. However, with paper markets at sky-high levels, McEwen recommends sticking with gold, which he believes could hit $1,800/oz in 2017.
McEwen believes the rush of money into stocks and the U.S. dollar is easy to understand with Trump’s planned spending on defense, infrastructure and a pro-USA procurement policy. McEwen expects the labor market to tighten, prices of goods and services to rise and inflation to emerge in 2017. For bargain hunters, there has rarely been a more opportune time to own physical gold.
Jeffrey Christian, managing director for research firm CPM Group, thinks gold will move higher in 2017. According to Christian, both the dollar and stock market are on a “sugar high” and is unsustainable. Another key fundamental support for gold prices is the continued recovery in private-sector investment demand, which is expected to hit a level in 2017 that is almost double the globe’s 2015 buying levels.
Credit Suisse analysts Anita Soni and Robert Reynolds expect gold to top $1,400 an ounce in 2017. Why? Soni and Reynolds think 2017 will see increased protectionism, currency devaluations and ongoing geopolitical uncertainty and that will boost demand for bars and coins. The combination of lower taxes and higher spending will have to be financed through deficits. In addition, the Credit Suisse analysts point out that Trump’s avowed protectionism and anti-immigrant positions are inflationary and they expect gold supply/demand to improve in 2017.
Bloomberg Intelligence’s global head of metals and mining research Ken Hoffman says the bullish case for gold is very much alive while also offering strong safe-haven benefits. Hoffman expects gold to top $2,000/oz soon.
DON’T LET 2017 STEAL YOUR HARD-EARNED STOCK MARKET GAINS
While the end of 2016 has rewarded stock investors with gains, many experts think the fundamentals don’t support this level of optimism. Frankly, the fundamental uncertainties that plague our country and the global markets show no signs of abating. Owning gold makes sense if you want to hedge the risks that are coming in 2017.
If you’ve benefited from the recent run-up in stocks, it is a great time to consider diversification so your eggs don’t all end up in one basket.