The last decade has been tumultuous, with widespread instability deepening the divide between east and west.
In his talk at this month’s Metals Investor Forum in Vancouver, BC, Robert Sinn, senior content creator at Goldfinger Capital, examined the current macroeconomic situation and the role he expects gold to play in it.
Highlighting how China’s strong gold buying has supported the yellow metal’s price, he also spoke about how Donald Trump’s return to the White House could impact relations with the Asian nation.
China and US economies in chaos
In the weeks before his inauguration, Trump discussed several issues with his counterparts around the world. Perhaps most notable was his talk with Chinese President Xi Jinping. According to tweets and reports from the Chinese government, the discussion between the global rivals was friendly and positive.
The messaging was encouraging to financial markets and helped strengthen the US dollar.
However, Sinn told the audience that he doesn’t see this positivity lasting long.
“I don’t think it’s going to be like this forever. I think that they’re going to definitely go head-to-head, toe-to-toe — try to get the best deal for their country,” he said, noting that an adversarial turn is likely.
Describing the two economies, Sinn said they are both volatile, but at different ends of the spectrum.
China is still reeling from its economic implosion and dealing with high levels of debt and deflation, but Sinn believes the situation is much worse than the data being presented to the world states.
“They can’t really fake up the bond market that much. So this is a telling story, an economy that is in a downturn — there’s just too much debt, and price levels are falling and so are bond yields,” he said.
Sinn also pointed out that the Chinese economy is very unbalanced. The country has the largest banking system in the world, US$50 trillion larger than the US. However, it still hasn’t recovered from the implosion of its real estate sector, and the recovery is slow because it’s a highly regulated market with strict government controls.
Meanwhile, in the US, Sinn noted that following the US Federal Reserve’s 50 basis point interest rate cut in September 2024, bond yields came off their longest inversion in history, which lasted 24 months.
He also explained how this came alongside an overvalued US dollar.
“It’s actually the most overvalued it’s been since 1985, so this is like a 40 year high in terms of its valuation. You can go back to 1985 and what happened shortly after — it got super overvalued and hit up a red-light level. It fell very sharply because of what they did in Manhattan at the Plaza Hotel,” Sinn said.
He was referring to the Plaza Hotel Accord in September 1985. At that time, representatives from several European nations and Japan met in New York with members of the US Department of the Treasury to discuss the depreciation of the US dollar and to correct trade imbalances between nations.
The move was largely successful, and trade was balanced over the next five years.
Sinn suggested that something similar may be about to occur, leading to considerable uncertainty. The US is further challenged by a massive US$2 trillion deficit and US$7 trillion worth of debt that needs refinancing in 2025.
However, he expects the US to extend the 2017 tax cuts made under Trump. This will require the US to commit to more deficit spending, and Sinn sees a squeeze on the dollar coming.
“Trump sees this problem, his team sees this problem, and one of their key objectives is to weaken the dollar during his term. Trump is pro-growth; he wants to see the stock market go up and the economy strong,” he said.
Trump’s promises to raise tariffs on China have countered this, and Sinn doesn’t see this happening — at least not immediately. “China and the US need each other,” he noted.
Both nations have cards to play. The US knows the position of the Chinese economy, and the threat of US tariffs may be enough to get the country to the table on new agreements.
“Trump knows he has the upper hand, but he also knows he can’t set the bomb off, because it will hurt him too,” Sinn said. “He wants to put 60 percent tariffs on the table. That’s the starting point; if that happens, it’s going to be a mess.”
Gold is China’s trump card
As a monetary metal, gold is often linked to what happens through the rest of the financial system.
When yields rise, gold falls, and when the dollar rises, gold falls. However, recently the price of the yellow metal has diverged from these traditional influences. Sinn credits this divergence to strong buying from central banks, most notably China, but also other BRICS nations. He believes China may be buying more than it is reporting.
“So China’s official stockpile is 2,300 metric tons, about US$200 billion of gold. I would estimate that their real stockpile is probably closer to 6,000 or 7,000 metric tons, near parity with the US,” Sinn said. He explained that China ramped up its purchases in 2022 following Russia’s invasion in Ukraine and the sanctions that followed.
It’s unclear what China plans to do with its huge gold stockpile, but Sinn thinks Trump may force its hand.
“To get out of this mess, China is going to have to do something with its currency. They’re going to either have to revalue higher or devalue. It’s not that clear what they’re going to do,” he said.
The preference for China isn’t to devalue the yuan, and it’s Sinn’s belief that the Trump administration doesn’t want that either, as it would further deepen the existing crisis. So what is the plan?
“They’re going to revalue the yuan higher against the dollar and they’re going to do a partial peg to gold,” he said.
However, Sinn also explained that China needs to be cautious when doing this, as it could create further problems for debtors and push the price of gold higher. To avoid this, the shift in yuan valuation would have to be accompanied by a massive stimulus injection and force inflation into the economy.
“It’s the big button on the table that you press when you have no other choice, and it will appease Trump,” Sinn said.
He thinks this also explains the rise in the gold price over the past month and the last couple of years.
Sinn expects China’s gold buying to continue as the country works through trade negotiations with the new Trump administration — and that the story is far from over.
Securities Disclosure: I, Dean Belder, hold no direct investment interest in any company mentioned in this article.
