Trade negotiations between the United States and China stalled this month. This has thrown the trade relationship between the world #1 and #2 economies into a tailspin. Gold stands to gain as this debacle unfolds for a number of reasons.

Firstly, gold is a traditional safe-haven asset. Investors tend to flock to it during periods of economic, monetary, and fiscal uncertainty.

A full-blown US-China trade war will spur all sorts of uncertainty. Indeed, economic uncertainty is already brewing as global supply chains get disrupted. The 25% tariffs that the US and China have slapped on each other has forced many companies searching for alternatives.

Additionally, the Trump administration blacklisting Chinese telecom giant Huawei is another major source of economic uncertainty. Many American companies sell parts and buy equipment from Huawei. Accordingly, many businesses on both sides of the Pacific will face disruption.

Investors tend to seek safe-haven assets whenever economic uncertainty increases. Indeed, this is precisely why gold prices almost doubled since the Financial Crisis. Accordingly, the economic uncertainty created by the US-China trade war will also boost gold prices.

A weakening Chinese yuan will also spur gold demand

Another casualty of the US-China trade war is China’s currency. The yuan fell about 2.7% over the last two weeks and is now trading at 6.92 to the US dollar.

This is dangerously close the to the psychologically important 7-to-1 level that could spur upheaval in financial markets. Indeed, if the yuan breaks this support, it could weaken rapidly as Chinese investors and savers abandon the currency.

Typically, gold demand surges whenever investors lose confidence in fiat currencies. This is particularly true for Chinese investors because of China’s long and often turbulent history. Over the centuries, countless governments and currencies have failed in what is now China.

Moreover, the only consistent store of wealth over the wide expanse of Chinese history is gold. Indeed, this is precisely the reason why Chinese culture developed such a strong affinity for the yellow metal. Accordingly, any sustained decline in the Chinese yuan will spur a tidal wave for the yellow demand.

Last year China was already the world’s top gold consumer at a hefty 1,151 metric tons. To put that in perspective, that’s more than a quarter of global gold demand. Moreover, that was before the US-China trade war really took off and Chinese yuan started to stumble.

Accordingly, Chinese gold demand could surge as the US-China trade war crushes the currency. Rising demand in the world’s top gold consumer will inevitably lead to higher prices. Investors would be wise to consider adding the yellow metal into their investment portfolio.

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