China is winning the war in the Middle East, and gold and the dollar will start to feel it, strategist says

By Jules Rimmer

China is proving itself to be better insulated from the energy crisis

China wants to replace the dollar's domination of global commerce and strengthen the position of the yuan.

China's resilience in the face of the U.S.-Iranian conflict has one strategist saying that gold will be the big winner and the U.S. dollar the loser from the revolution in the world order.

Luke Gromen is the founder of financial research firm Forest For The Trees and his interview with Eric Townsend of the Macro Voices podcast on Thursday was timely, given his strong opinions on superpower competition.

Asked about China's ability to emerge from the crisis stronger, Gromen points out that when the shooting started at the end of February this year, "This was always going to be a pain contest and the consensus was that China was going to get hit first."

That's not how things worked out. It was the U.S Treasury market that blinked first and threatened dysfunction.

China flexed its geopolitical power in March, Gromen argues. It was able to cut its oil (BRN00) imports by between 3 million to 4 million barrels per day and still grow. China demonstrated the benefits of its expertise in solar panels, battery technology and electric vehicles and showed the rest of the world how a nation might isolate and hedge itself from the foreign policies and oil strategy of the U.S.

Gromen is convinced that China is quite content to allow the conflict to persist because it depletes U.S. economic and military resources, strengthening its own relative position.

"If I'm China, I keep oil prices low enough for there not to be a crisis, high enough to keep inflation rising while simultaneously selling everyone on every side of every conflict the weapons they need." Gromen adds, "Look what's happening around the world to global bond markets because of the inflationary impulse of these conflicts."

He's right. Bond markets in the West are straining to contain yields. The U.S. 30-year bond BX:TMUBMUSD30Y is approaching 5.2%, European BX:TMBMKDE-30Y and Japanese yields BX:TMBMKJP-30Y are surging and "the only bond market in the world that's not straining on the upside is China." 10-year yields in China BX:AMBMKRM-10Y remain anchored around 1.75% where they have been for a long while.

China's long-term goal, Gromen contends, is "to change the global currency system towards one that better suits China." China wants gold (GC00) to replace the Treasury bond as a neutral reserve asset and to pay for oil and gas in yuan, settling in gold.

At some point, given the upward pressure on bond yields, Fed Chair Kevin Warsh and Treasury Secretary Scott Bessent are going to be confronted with a dilemma: sacrifice the bond market or the dollar DXY. Gromen expects the U.S. will deploy yield curve control and it's the dollar that takes the hit. This is what underpins his bullish view on gold (GC00):

"All those (Western) currencies should weaken together against the yuan, and gold. It's a huge puzzle to put together. It's too hard. Just buy gold."

The other interesting argument made by Gromen was that Chinese AI is suddenly starting to disintermediate the U.S. AI models at the frontier, which is something nobody thought possible. He describes how Chinese AI models, like all the other industries they've prioritized, began as a value proposition but now offer similar or even superior quality.

"Hey, the Chinese are cheaper but they'll never be better", to, "Oh, they're cheaper and better."

Power dominance. Energy dominance. Technological dominance. This is the trifecta, Gromen predicts for China versus the U.S.

In the meantime, while waiting for these trends to develop and intensify, Gromen is bullish on U.S. electrical infrastructure equities, owing to the bottlenecks around power generation. Exchange-traded funds like the Global X Infrastructure Development PAVE and First Trust Nasdaq Clean Edge Smart Grid Infrastructure Index Fund GRID look appealing to him.

-Jules Rimmer

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07-24-26 0622ET