Gold and silver are seeing gains from Friday’s high on Monday as economic and political warning bells go off. Sustained poor global economic date mixed with tensions in the EU and new tensions between the U.S. and China are creating fear in markets. Gold last reported p.m. today is $1228.40 and silver is $17.40.
Washington and the Fed may have been checkmated by China’s new Asian Infrastructure Investment Bank as our allies jumped ship but Washington isn’t ready to give up yet. Over the past several months the U.S. and China have been engaging in a game of cat and mouse in the South China Sea.
According to Reuters:
When the U.S. navy sent a littoral combat ship on its first patrol of the disputed Spratly islands in the South China Sea during the past week, it was watching the skies as well.
The USS Fort Worth, one of the most modern ships in the U.S. navy, dispatched a reconnaissance drone and a Seahawk helicopter to patrol the airspace, according to a little-noticed statement on the navy’s website.
While the navy didn’t mention China’s rapid land reclamation in the Spratlys, the ship’s actions were a demonstration of U.S. capabilities in the event Beijing declares an Air Defence Identification Zone (ADIZ) in the area – a move experts and some U.S. military officials see as increasingly likely.
“It’s not inevitable but if we are betting paychecks I’ll bet that they will eventually declare one, I just don’t know when,” said a senior U.S. commander familiar with the situation in Asia.
ADIZs are not governed by formal treaties or laws but are used by some nations to extend control beyond national borders, requiring civilian and military aircraft to identify themselves or face possible military interception.
China sparked condemnation from the United States and Japan when it imposed an ADIZ in the East China Sea, above uninhabited islands disputed with Tokyo, in late 2013.
Chinese military facilities now under construction on Fiery Cross Reef in the Spratlys, including a 3,000-metre (10,000-foot) runway and airborne early warning radars, could be operational by the year-end, said the U.S. commander, who declined to be identified.
Recent satellite images also show reclamation work on Subi Reef creating landmasses that, if joined together, could make space for a similar sized airstrip.
Growing concern in Washington that China might impose air and sea restrictions in the Spratlys once it completes work on its seven artificial islands is likely to be on the agenda when U.S. Secretary of State John Kerry meets Chinese leaders in Beijing this weekend for previously scheduled talks.
The South China Sea might prove more problematic for China given the complexity of the dispute and the possibility of challenges from the U.S. navy and air force.
Indeed, on Tuesday, a U.S. official said the Pentagon was considering sending military aircraft and ships to assert freedom of navigation around the Chinese-made islands.
China’s Foreign Ministry responded by saying Beijing was “extremely concerned” and demanded clarification.
On Friday it accused the Philippines of working together with the United States to “exaggerate the China threat” over the Spratlys.
China had recently warned Philippine air force and navy planes at least six times to leave the Spratlys, the Philippine military commander responsible for the region said last week. The planes refused.
Zhang Baohui, a mainland security expert at Hong Kong’s Lingnan University, said he was worried about the risk of confrontation from any U.S. show of force.
“It’s reckless,” he said, referring to Washington’s latest plans.
“It has a built-in dynamic for unintended escalation,” he added. “Are they willing to take the consequences of this escalation?”
At sea, tensions are already apparent.
The naval statement about the USS Fort Worth, which can also hunt submarines and support amphibious landings, noted the ship “encountered multiple People’s Liberation Army-Navy warships” during its patrol. It did not go into detail.
“Our interactions with Chinese ships continue to be professional and (the Code for Unplanned Encounters at Sea) helps clarify intentions and prevent miscommunication,” Commander Matt Kawas, the Fort Worth’s commanding officer, said in the statement.
This has more to do with China’s threats of removing reserve currency status from the U.S. dollar than it does with man-made islands. Our guess is that China will continue calling Washington’s bluff until it reaches its goal of becoming the new super power.
One of the U.S. “Big Six” banks is issuing a warning to stock investors that markets are in a transition period it calls, “The Twilight Zone.” Bank of America stated:
Investors remain trapped in “The Twilight Zone”, the transition period between the end of QE and the first rate hike by the Fed, the start of policy normalization…until (a) the US economy is unambiguously robust enough to allow the Fed to hike and (b) the Fed’s exit from zero rates is seen not to cause either a market or macro shock (as it infamously did in 1936-7), the investment backdrop will likely continue to be cursed by mediocre returns, volatile trading rotation, correlation breakdowns and flash crashes. For this reason we continue to advocate higher than normal levels of cash, adding gold and owning volatility in mid 2015. Given extremities of liquidity, profits, technological disruption, regulation, income inequality…potential for a cleansing drop in asset prices cannot be dismissed. Most likely catalysts: Consumer, Rates, A-shares, Speculation, High Yield.
In a nut shell let’s put it this way: Since 2008, the Fed has pumped stock markets hoping investors would believe all is well and somehow this would translate into a healthy economy. It didn’t happen, not even as media soothsayers continue singing the same line today.
We don’t know the hour or day but tremendous corrections are coming and Fed monetary actions have guaranteed it. How we protect our wealth is the difference between seeing real gains and suffering loss.
Protecting our IRA or other qualified retirement account with physical precious metals guarantees a portion of our assets can’t be wiped out. Can we say the same for over valued paper stocks?
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