Hey There Income Hunter,

Nancy Pelosi’s trip to Taiwan has the world trying to work out if the small Pacific island will be the United States’ next big crisis.

The bottom line is, Pelosi is the first high-ranking US official to visit Taiwan since Newt Gingrich in 1997.

And the reason for the absence is simple: China believes it owns Taiwan and Beijing wants America to stay out of its domestic issues.

The trip certainly increases US/China tensions and pushes China to further de-dollarize its foreign reserves.

That means selling US assets and buying gold … and it is no coincidence that the price of gold has risen $100 over the past 10 days. 

Understand, since 1945, the US has held by far the most physical gold of any government worldwide. The US holds 8,133 tonnes in official reserves, while China is “officially” listed in sixth, with just under 2,000 tonnes.

How much the Chinese hold unofficially is the question, and as the gold rally builds, momentum money flows stand to increase dramatically.

Today, let’s look at what will drive buying in the months ahead.

Golden Dragon

There is little doubt from gold market observers that China’s unofficial reserves are much higher than reported.   

Here is the consistent growth of their official reserves since 1995.

Now, officially, China has a long way to go.

But as the saying goes, whoever owns the gold makes the rules. That certainly worked for the US when we assumed global primacy in 1944. 

China’s mission for 50 years has been to overtake the US as the dominant nation and their leaders understand the importance of owning more physical gold. 

China is also the largest producer of gold, and there is no requirement to report domestic production. It’s almost a certainty that number is underreported to gain an edge on the US.

Then there is the official import data, which as you can see below has increased significantly in the quarter. This will be key to watch, because continued accumulation will increase the probability of gold being used as a settlement vehicle in global trade. 

Selling Treasuries to Buy Gold

China still holds close to one trillion in US Treasury securities, which were purchased with the U.S. dollars that flowed into China as exports of China’s goods flowed to the U.S.

China has been selling Treasuries since the 2008 crisis and monitoring the pace of selling will be key for trading in the months ahead. 

Pelosi’s visit to Taiwan has now put China and Russia on high alert, and the move to de-dollarize is becoming more imminent. Both China and Russia realize that the country that controls the most gold has the advantage.

Physical Gold Chart

A couple of key signals from yesterday: one is the break above the downtrend line from March, plus a close above the 50 DMA. Gold closed above the latter by a whisker. 

The foundation for an extended rally on this move is strong. That’s due to the money fund position being short, according to the new position report published by the Commodities Futures Trading Commission. 

The one dark cloud over gold is the Fed tightening into a recession. That could create a deflationary market crash and pullback in gold temporarily. 

Traders need to committo  holding on longer-term, because ultimately a market crash will force the Fed to pivot back to easing and that will be extremely bullish for gold. 

Bring It Home

The employment number out today should not have a huge impact on the market. 

The biggest force is geopolitical, and I think after the Pelosi trip there is more of a sense of urgency for the BRICS alliance (​​Brazil, Russia, India, China and South Africa) to move forward. 

The next couple of weeks may be quiet as Europe is on vacation and there is no Fed meeting in August. That could mean we see the market settle into a range.

As far as gold goes, I think buying on dips and hedging with bear strategies in the equity indexes will be a good strategy until the Fed is forced to pivot. 

Then your portfolio will indeed be golden.

Live and Trade With Passion My Friend,

Griff