China's Live Fire Drills Around Taiwan

China commenced two days of military exercises around Taiwan on Thursday, describing them as a "strong punishment" for the island's "separatist acts." Taiwan’s new president, Lai Ching-Te, has started his new role with a bang by speaking about Taiwanese independence. China labelled the speech as a "confession of independence" and has begun drills surrounding the island and firing live ammunition.

China has vowed to reclaim Taiwan by force if necessary and has been practicing for this scenario in an increasing frequency. The Chinese military stated that the exercises aim to "test the joint real combat capabilities of the forces of the command."

Taiwan responded by swiftly mobilising its forces and pledging to defend freedom. The Ministry of National Defence condemned the drills as irrational provocations that threaten regional peace and stability. Taiwan deployed sea, air, and ground forces to protect its sovereignty and democracy.

China had already warned earlier in the week of severe consequences following Lai's speech which celebrated a glorious new era of democracy for Taiwan. China's top diplomat, Wang Yi, cautioned that Taiwanese separatists would face historical disgrace.

The ongoing drills, named "Joint Sword-2024A," focus on joint sea-air combat readiness, battlefield control, and precision strikes on key targets. They are taking place in the Taiwan Strait and around Taiwan's outlying islands.

The Chinese military stated that the exercises are intended as both a punishment for Taiwanese separatist actions and a warning against external interference and provocation.

China's last major military drills around Taiwan occurred in August 2023 after Lai visited the United States. The drills then were also described as a stern warning. These drills tested the ability of the Chinese military to control air and sea spaces under real combat conditions.

Earlier exercises in April simulated the encirclement of Taiwan and were triggered by a meeting between Lai's predecessor Tsai Ing-wen and then-U.S. House Speaker Kevin McCarthy in California. China had also launched significant military drills in response to visits by former U.S. House Speaker Nancy Pelosi and Tsai’s travel through the U.S.

If this conflict worsens, it has the potential to derail global semiconductor supply. It could also cause blockades in some of the largest shipping lanes in the world. Historically, tension around Taiwan has led to spikes in the price of gold. Gold/AUD has just had a strong dip in price in the last day due to excitement about AI potentially boosting the stock market. We look towards China's live fire drills today to see how they may potentially affect gold's price.

China have ramped up gold buying in recent months as they also sell down U.S. Treasuries. Probably unrelated though…