Gold: Your Best Vaccine Against the Globalism Virus

“May you live in interesting times,” goes that old Chinese curse.

And if times are not “interesting” enough, one might add, China will make them so.

We live in a world of economic tumult, courtesy of the virus out of China.

It dominated the conversation at the annual gathering of the Prospectors & Developers Association of Canada (PDAC) in Toronto, where I spent the past few days.

Normally the conference is all about metals and mining. We talk up precious metals like gold and silver. But PDAC also covers many other elements, from copper, lead and zinc to uranium, rare earths and “battery metals” like nickel and cobalt.

So it’s very telling that these “rock hounds” – many with PhDs in geoscience, as well as in subjects like chemistry, math and physics – couldn’t stop talking about the China virus. The Toronto takeaway is that nobody really knows what this virus is going to do.

Nobody anywhere really knows…

We’re in early innings in terms of medical angles. But the PDAC consensus is that this bug is making the global economy quite sick. And gold is sure to move higher.

How sick is the global economy? Very sick…

China accounts for massive amounts of global production of a near-endless array of things, and its economy has all but frozen up. Indeed, Chinese business activity has pretty much fallen off a cliff.

Caixin

The steep drop you see in the chart represents entire regions of China going into government-imposed quarantines. People can’t move, can’t go to work. Even in places where they can, they might lack supplies at the factory. Or they can’t ship product out.

At PDAC, I spoke with a Russian mining executive. He said that most Russian commerce with China is at a literal standstill. Tens of thousands of railway cars are parked on sidings of the Trans-Siberian Railway, unable to clear customs and move into China.

It doesn’t matter, though, because many Chinese buyers are shut down and cannot accept shipments. “We might not get paid by factories that are closed. And we want our rail cars back,” he added, “but not if we have to worry about getting sick.” Russian logic.

Meanwhile, Aviation Week magazine explained how in early January, China was serviced by about 3,500 international flights every day, connecting about 850 “city pairs.” Today, China receives only about 700 daily international flights, connecting about 225 city pairs. It’s a drop in the range of 80% or more. And most of those current flights are air cargo. That is, passenger traffic in and out of China has all but dried up.

One ocean shipping site states that about 100,000 40-foot containers per day are delayed or deferred loading at Chinese ports. Many cargo sailings have been cancelled, or ships are moving with far fewer containers aboard.

It means fewer containers will land at U.S., Canadian and other ports of the world, beginning about… well, right now.

On cue, the Port of Long Beach just announced dramatically lower numbers of landed containers. This translates into fewer rail cars and trucks hauling goods to warehouses, trans-shipment nodes and various big-box outlets across the country.

You can expect that those shelves of Chinese-made goods that you see everywhere — from the drug store to grocery store to shopping mall — will hold fewer and fewer items. The China supply chain is badly broken.

According to Lars Jensen, CEO of Sea-Intelligence Consulting, “what we are seeing now is the impact of a much larger systemic risk. Blocking a large number of vital nodes in the system for all players at the same time threatens to create a disproportionately large impact, lingering longer than usual.”

Jensen may be understating the case. That is, China illustrates the collapse of a very complex system which required many years, and vast amounts of money and energy, to assemble and perpetuate. It’s straight out of a superb study of the subject by archaeologist Joseph Tainter, in a fascinating book, The Collapse of Complex Societies, published in 1988.

Tainter describes numerous societies from history that built themselves out in ways that required significant ongoing expense to maintain. “Complex” societies, he argues, have significantly higher costs per capita. Along those lines, think of the vast logistics system that moves supposedly “cheap” products from Chinese factories to American store shelves.

Tainter describes how complexity eventually reaches a point where it collapses. Sometimes it’s a gradual decline, but often as not collapse proceeds from a calamity due to some external shock such as natural disaster or war. Or in this case, the shutdown of a broad economy due to disease.

My old friend Jim Kunstler phrased the idea nicely the other day: “Once a gigantic and fantastically precise mechanism breaks, I doubt it comes back together neatly and quickly.”

In other words, even if the virus went away tomorrow, it would take months or years to “get back” to the previous way of doing things.

And let’s get real here… Whatever happens in the future, the next system will NOT be an imitation of the past. Just a few weeks of system shock are enough to drive the point that “globalization” — in terms of buying vast quantities of stuff from China — is over.

Here’s an example of what this could mean…

A long-time friend and professional colleague is an expert on rare earth elements (REEs). These elements and alloys are used in all manner of advanced tech, from your smart phone and television set to nuclear-powered submarines. And China is the source of about 85% of the world’s REE output.

My friend insists that Chinese REE stockpiles were mostly depleted before the virus took hold. Now, China’s REE output has plummeted due to virus quarantines and shortages of materials. He expects a massive spike in REE prices as 2020 unfolds.

If true, the REE sector should attract investment in the months and years to come. The non-Chinese REE space needs new capital to develop ore deposits, new mines and sources, as well as downstream processing and output of deliverable REE products. So we’re looking at a strong economic environment for this industry to expand outside of China.

Of course, REE is just once example.

China’s economic lockup has deeply impacted the fortunes of many companies that have production or supply arrangements with the country.

As a result, we’ve seen serious drops in Western stock markets, certainly in the U.S.

This week, the Federal Reserve (Fed) cut interest rates to assist U.S. markets. And President Trump has discussed cutting payroll taxes to add more money to Americans’ paychecks . Plus, there’s discussion of a long-delayed national effort on infrastructure — roads, bridges, tunnels, etc. — which will employ workers and use vast amounts of basic materials like concrete and steel.

These may sound like sensible measures… but the U.S. government is already deep in annual deficit. Less intake from payroll taxes and more outflow for roads, bridges, etc. will only add to the deficit.

Whatever the merits of lowering rates and pumping money into the economy, it means more and more dollars. Or, put another way, inflation.

The monetary trend favors precious metals, especially gold. In fact, this is already happening…

Recently, gold moved up on expectations of inflation then suffered a severe crash-back at the end of February due to margin calls. That is, people sold “paper” gold to raise fast cash. When in distress, you sometimes sell what you must sell, not what you might like to sell. And gold always has a market; even paper-gold.

But after the Fed cut interest rates a few days later, gold’s price soared again. People expect low interest rates and more government spending to be inflationary. Thus we see a flight to safety in gold.

That flight to safety will only intensify if the Chinese virus continues to spread unchecked. And it won’t be “checked” until we know more about it.

Opinions differ on the origins of the virus. Some people accept the idea that it’s an exotic bug that evolved in Chinese bats or snakes. Others believe it could be something else; perhaps a bioweapon experiment that went bad and got loose. And despite the tinfoil hat angle of the bioweapon origin, how the virus originated does matter.

If the virus is a product of natural evolution, then it’s likely not going to wipe out mankind; not even close. Nature doesn’t work that way. As with many novel bugs, some people will get sick, and some people with compromised immune systems will die. But most people — almost everyone — will basically be okay.

If the virus is a bioweapon, though? Well…

If the Chinese bug is synthetic, then it likely has unknown and poorly understood properties. The pathway of infection and illness could take some dark turns. And on that, we just don’t know.

Wherever the virus came from, the Chinese government screwed up by not containing it early. It’s what Communist governments do, though; it’s how they roll. The virus was present in Wuhan in late October, and more and more cases popped up in November and December. That was when honest assessment and tight quarantine could’ve worked.

Now the bug is out of the bag. It’s global, and going more global by the day.

Meanwhile, the second and third order effects of the bug are stepping on the proverbial oxygen hose that supports China’s economy.

Ironically, the same bug that makes people sick, and even kills them, is also killing day-to-day, globalist-style world commerce and trade. I suspect that when all is said and done, the legitimacy of the world’s China-trade will disconnect, and fade significantly.

People and companies across the globe are already rethinking the China-China-China idea. China no longer offers its former level of security to the global supply chain. The entire risk assessment of doing business in China has altered fundamentally.

At the same time, the battle to keep the global economy somewhat intact is rapidly moving towards massive inflation.

And the winner is… gold.

Gold is your vaccine against the virus of globalism.

On that note, I rest my case.

That’s all for now… Thank you for subscribing and reading.

Best wishes,

Byron King

Byron King
Managing Editor, Whiskey & Gunpowder
WhiskeyAndGunpowderFeedback@StPaulResearch.com

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Byron King

A Harvard-trained geologist and former aide to the United States Chief of Naval Operations, Byron King is our resident gold and mining expert, and we are proud to have him on board as the managing editor of Whiskey & Gunpowder.

This “old rock hound” uses his expertise and connections in global resource industries to bring...

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