A war-plan for Canada: Buy gold, sell oil, build

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John Rapley is a contributing columnist for The Globe and Mail. He is an author and academic whose books include Why Empires Fall and Twilight of the Money Gods.

Who can say why Donald Trump left the G7 Summit early? But amid the dramatic events of the last week, the message to Canadians can arguably be summed up as: buy gold, sell oil and get building.

Since the end of the Second World War, when the United States emerged as the unrivalled global hegemon and created the dollar-based world trading system, a golden rule operated: in a geopolitical crisis, investors from all over the world would rush to the haven of the United States. As a result, the dollar would rise in value and bond yields would fall, as everyone snapped up treasury paper.

That rule appears now to be broken. Despite the breakout of a major war in the Middle East, the dollar continues weakening and U.S. bond yields remain on an upward trajectory. Instead, everyone’s rushing to buy gold. The precious metal has now overtaken the euro as a reserve currency and is eating into the dollar’s share – 20 per cent of global reserves as opposed to the greenback’s 46 per cent – and a recent survey revealed that the world’s central banks are expected to boost their gold stocks further in the course of the coming year.

Driving the erosion of the U.S.’s haven status has been the presidency of Donald Trump. His erratic policy-making, on-again-off-again tariffs and threats to default on debt or tax foreign investments have all diminished the attractiveness of U.S. assets. So it’s no surprise that the recent decline of the dollar has almost perfectly tracked his second presidency.

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Although the received wisdom in markets is that America’s strong institutions will prevent temporary setbacks from becoming permanent, this confidence underestimates the importance of political commitment to institutional resilience. Americans have shown they are prepared to elect a president committed to smashing the institutional framework that has underpinned American hegemony – and if they did it once, they can do it again. We’re moving towards a post-dollar world, and that will pose challenges to countries like Canada so tied into the dollar bloc.

Yet another significant development of the last week has been the unusual behaviour of world oil prices. In the past, Mideast wars led to price spikes and even global recessions. This time, prices have risen, but only back to the levels at which they’ve held over the last three years. Even amid this conflict, oil supply is expected to outstrip demand this year, and China’s demand for fossil fuels looks set to peak ahead of earlier forecasts, in 2027. Across the developing world in particular, the energy transition is proceeding quickly, and the volatility of oil and gas prices is a big drawback compared with the stability of renewable supply.

In the short to medium term, Canada is likely to enjoy a windfall from the instability in the Middle East, because it’s a safe-and-reliable oil-and-gas supplier at a time when U.S. production may have peaked. But it would be a mistake to treat this boon as a return to good times. Instead, the country should be using any windfall to support the development of new products and industries, because the oil industry looks set for long-term decline.

To do that, Canada needs to get building. With global investors looking to diversify away from the U.S., and American entrepreneurs and academics contemplating moving to greener pastures, Canada enjoys a moment of singular opportunity. But the country’s markets remain largely closed, with barriers to entry inhibiting the building of everything from houses to infrastructure. The same goes for interprovincial barriers or licensing regimes designed to protect existing businesses or job holders from competition by erecting artificially high barriers to entry. Canada, at least, gets this, and is starting to move in the right direction.

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Donald Trump has turned out to be a one-man geopolitical crisis. The fact we still don’t know why he left a summit U.S. presidents long prioritized – if it really was to do something “much bigger” he declared, he apparently changed his mind – shows how capricious U.S. power has become. Navigating the newly volatile world which will result will be a huge challenge, not least for a country whose economy is as integrated with the U.S. as Canada’s.

The good news is that unlike the U.S. or several European countries, which are deeply divided about the way forward or crippled by inertia, Canadians are largely on the same page at the moment. In a widely read piece in the Financial Times, Scotiabank head Scott Thomson wrote this week that Canadians are “coalescing” to “unlock the country’s economic potential,” and that this could be the watershed year in which the country reinvents itself. That sense of optimism and possibility is one that is hard to come by today in many Western countries. Canadians should seize on to it while it lasts.