January 2023 Newsletter

Hedging in a Changing World

The world is witnessing a great power conflict between the United States and China. The winner of the conflict, especially the currency war between these two, may well advance western or eastern hegemony for decades to come; that is, their social, cultural, and economic influence over the world. In this regard, globalism isn’t’ dead so much as changing. So much is at stake as these two superpowers spar daily. Your investment portfolio will be affected in 2023 as the reopening of China either disappoints or advances sharply despite the headwinds of a real estate bust and a slowing birthrate not witnessed since 1950.


China is vying to capture the predominant hegemony in this world currently owned by the United States and its allies. The Chinese Communist Party and the Central Bank of China are engaged in a concerted effort to hoard global commodity supplies. This includes crude oil, copper, corn, and wheat, giving them an unprecedented level of control over its availability worldwide. It is part of their strategic plan. China’s aggressive stockpiling of gold and establishing long-term contracts for oil supplies, putting pressure on raw material prices longer-term. One can’t help but feel as though the Chinese Communist Party is actively preparing themselves for an upcoming conflict.


So, while China places strategic value on raw materials, the U.S. places strategic value on advanced computing power; endeavoring to secure dominance in the field of quantum computing. This is technology that runs through the Dutch town of Veldhoven, home of ASML. Without ASML’s extreme ultraviolet lithography technology, which etches three-dimensional lines for microscopic circuitry for semiconductors, China cannot keep up with the United States in quantum computing.  The United States is working with Japan, Taiwan, and the Netherlands on sanctioning ASML’s technology. Traditional values no longer hold true as each nation dukes it out by seeking a commanding positioning within different resource categories, providing investor insight into what hard-fought battles may lay ahead.


Since WWII, the U.S. has been able to maintain its hegemony in world affairs largely due to its strong position in the oil market which is quoted in the U.S. dollar. Now however, many nations are seeking an alternative to this market which trades in dollars. China supports any action which weakens the U.S. dollar and is focused on establishing a market for oil in yuan. The stability of financial market may as


China makes a major play for world domination in raw materials. Since 2019 the Chinese have accumulated 80% of global copper inventories, 70% of corn, 51% of wheat, 46% of soybeans, 70% of crude oil, and over 20% of global aluminum inventories. Moreover, China is aggressively stockpiling physical gold. Investors have taken note. The prices of some gold stocks are up over 30% in the last three months. During the same time frame the S&P 500 is up about 8.5%. By hoarding commodities like copper, corn, wheat, and soybeans – not to mention crude oil and aluminum – China is preparing their strategic stockpiles to gain influence over Western banks.


With the goal of weakening America’s dollar, China is pursuing a strategy that includes driving U.S. inflation and recessions as well, hindering U.S. and European investment returns by giving lip service to Net Zero and ESG projects. Meanwhile, China is using European sanctions against Russia’s war in Ukraine to sign long-term oil contracts with Russia. It fits nicely with the Chinese objective to dominate the commodities and oil markets.  It also gives the Russians a way to skirt European sanctions.


Even in 2023, 90% of global energy needs are reliant upon fossil fuels during a time when supplies are tight, and capacity is limited.


China has a bold strategic vision to remove dollar dominance in financial and commodity markets. And here’s how it plans to achieve their goal. They are negotiating with world oil producers to establish a petroyuan market. As part of their strategic plan, China will invest in the oil producing country’s ports, refineries, and roads (their infrastructure) if the oil-producing nation will establish long-term oil contracts China in which the yuan can be used for payment.  For this trading relationship the Chinese promise to allow the accumulation of yuan to be traded for gold using the new Chinese gold exchanges: located in Hong Kong and Shanghai. With long-term oil contracts, China is strengthening its global influence.

By weakening the U.S. dollar and fortifying their own currency the Chinese hope to transform the international exchange markets. India, Russia, and Saudi Arabia are looking for ways to benefit from this shift away from the traditional reliance on the American greenback.  With such hefty political power backing it, it is no wonder that oil remains center stage when evaluating economic superpowers.

After European sanctions on Russian oil were announced in 2022, Russia and China have ignited a new era of global energy dealings. By 2023, the UAE & India are aiming to settle gas/oil trades using exclusively local currency. By 2025, Chinese authorities want all OPEC nations utilizing Shanghai exchanges so that sales made into their country will be settled only in renminbi (yuan). Meanwhile, one of OPEC’s leading spokesmen stated this week that oil production is not keeping up with world demand. He projected that by the year 2045 the world will need an additional 10 million barrels of oil per day.


China’s actions against U.S. interests include the pandemic, supply chain issues, U.S. fiscal and monetary policy actions, increasing U.S. debt levels, Fed rate hikes, and commodity hoarding.


China’s reopening represents a change in direction away from their previous zero-covid policy. This change should dramatically assist China and the region in regaining economic growth. However, in the three years since China set about containing the virus much has changed. Robots now account for much of the automobile output going to China, significantly improving output costs, improving profitability and improving European automaker resilience. Gold output appears to have slowed.  So, while governments like gold as it forces them to be honest with the value of their currency, Winston Churchill once considered putting the UK on the gold standard his worst mistake. World gold output grows at such a small percentage each year it limits economic growth to the sum available.   Nevertheless, Central Banks around the world bought a record quantity of gold last summer as a hedge against declining currencies and they are all declining – though perhaps not as much as the dollar recently. Nevertheless as the Japanese yen, the Euro, the Mexican peso, and the Ruble rebound and investors recognize the triple skim going on in the United States as taxes go up, the dollar falls (due to the anticipation of lower interest rates later this year) and inflation eats away at purchasing power, most every portfolio may seek to hedge against these influences, including China’s Central bank hoarding, by holding a portion of this non-ferrous and precious metals asset classes; the ones crypto tried to replace.



Vaughn L. Woods, CFP, MBA

Vaughn Woods Financial Group, Inc.

2226 Avenida De La Playa

La Jolla, CA 92037




Investors should be aware that there are risks inherent in all investments such as fluctuations in investment principal.  Past performance is not a guarantee of future results.  Asset allocation cannot assure a profit nor protect against loss.  Although the information has been gathered from sources believed to be reliable, it cannot be guaranteed.  Views expressed in this newsletter are those of Vaughn Woods and Vaughn Woods Financial Group and may not reflect the views of Bolton Global Capital or Bolton Global Asset Management.  The information provided is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice.  VW1/VWA0282.