What A China-Taiwan Conflict Could Mean For Semiconductors, Gold

Via SchiffGold.com,

American-made weapons will soon be bound for Taiwan, American lawmakers are telling Taiwanese President Lai Ching-te, sending shockwaves of uncertainty through electronics and metals markets this week.

In a pointed “celebration” of Lai’s recent inauguration, Chinese military aircraft and warships have been conducting large-scale drills around the island. China considers Taiwan a strayed member of its territory and hasn’t ruled out the use of force to assert its claim.

“China will surely be reunified,” Chinese President Xi Jinping said in his New Year’s address. “Compatriots on both sides of the Taiwan Strait should be bound by a common sense of purpose and share in the glory of the rejuvenation of the Chinese nation.”

Michael McCaul, U.S. House Foreign Affairs Chairman, told Fox that the recent Chinese demonstrations are the most “provocative” yet. If China attacked Taiwan, McCaul predicted during his visit to the region, “it would make Iran shooting into Israel look like child’s play.”

“I think right now, we will probably lose,” he said.

One likely victim of such a conflict would be Taiwan’s semiconductor industry, which holds about 70% of the world market share. Total industry value is expected to set a record this year at $630 billion—but that could change if China invades Taiwan and, as McCaul warns, “the island doesn’t have the capacity to defend itself” or its industry.

“Everybody that has phones, cars—we have advanced weapons systems—everything’s dependent on semiconductors and this island, over time, because we’ve offshored [manufacturing],” McCaul told Fox News Digital. “And the shutdown of what’s happening [in Taiwan], semiconductors, would really shut down the world.”

Changes in the market for semiconductors mean changes in the market for many base metals, including silicon, germanium, and gallium, all of which are critical components for semiconductor manufacturing. Gold is also a key component of the production process because of its anti-tarnishing properties.

With a semiconductor shortage could come other electronics shortages, squeezing markets for everything from refrigerators to cell phones to electric vehicles. There’s precedent for such a shakeup, which occurred during the semiconductor shortage of the COVID-19 pandemic—and back then, the economic pandemonium didn’t stop short at consumer electronics.

“The recent semiconductor shortage isn’t some far-off issue—it affects everyday citizens around the globe,” the Council on Foreign Regulations reported last year. “Supply-chain challenges can yield price hikes for consumers and lost jobs for manufacturers. Companies laid off thousands of workers [during the COVID shortage] because the United States lacked chips.”

Such a drop in semiconductor production might initially appear to signal a decrease in demand for component metals, like gold. That seems to be the market’s immediate intuition, as shown by mildly ebbing gold prices following the Chinese drills—but a major complicating factor is quickly becoming apparent. China, already one of the world’s largest gold consumers, is busy buying up the precious metal at record rates. The country’s aggressions toward Taiwan will likely continue to drive precious metal prices upward, signaling a second precious metals boom when coupled with the rising market uncertainty and inflation that inevitably follow conflict.

“China is unquestionably driving the price of gold,” Ross Norman, chief executive of MetalsDaily.com, told the New York Times. “The flow of gold to China has gone from solid to an absolute torrent.”

Some experts suggest the move to amass precious metal stores could signal preparation for larger Chinese military involvement in Taiwan and increasing avoidance of ties with the U.S. dollar, which may be sanctioned in response to Chinese aggression. In short: China is betting on gold, not the dollar.

“There is absolutely no question that the timing and the sustained nature of [China’s gold] purchases are all part of a lesson that [the Chinese] have drawn from the Ukraine war,” Jonathan Eyal, associate director of the UK’s Royal United Services Institute, told the Telegraph. “The relentless purchases and the sheer quantity are clear signs that this is a political project which is prioritized by the leadership in Beijing because of what they see is a looming confrontation with the United States.”

“If [China] get[s] much closer to bullying Taiwan and countries start to move their investments out of China, [the gold reserves] will give them a bit of padding to be able to ride through some of the difficulties,” added Sir Iain Duncan Smith, co-chair of the UK Interparliamentary Alliance on China.

Meanwhile, the President has signed an aid package with $8 billion earmarked for Taiwan and the surrounding region, a move that aggravated US-China relations and will encourage economically painful sanctions on both sides. Such spending could also pull the trigger on domestic inflation, resulting in the continued weakening of the U.S. dollar even as the Chinese economy is strengthened by its gold reserves.

This type of monetary policy is why some economists, including Danial Lacalle of the IE Business School in Madrid, are sounding alarm bells at governmental inflation employed as a “policy, not a coincidence.” In this environment, Lacalle warns, it’s a bad idea to bet on inflated currency when choosing investments.

“Staying in cash is dangerous; accumulating government bonds is reckless; but rejecting gold is denying the reality of money,” Lacalle said.