China and U.S. Heading for a Cold War? What Impact on Gold?

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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.

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.

. . . 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.

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