Trump’s Trade War Might Be a Bluff, But It’s a Big Enough Shock to Boost Gold Prices
In the shadow of a trade war, precious metals should gain by the virtue of their safe-haven investment nature. Why then has the gold price not moved higher?
President Donald Trump has imposed tariffs (a fancy name for customs duties) on certain Chinese goods. Meanwhile, Trump’s 25% tariff on steel and 10% tariff on aluminum kicked in on June 1.
In the aftermath, stock markets have shown volatility. While the Dow Jones record of over 26,600 points—set in January 2018—has become a fading memory, stock prices by and large have been balancing themselves out.
This limbo-like financial market framework has altered the physics, if you will, of gold prices. A classic analysis of stocks, which considers the typical performance drivers, would have already sent stocks tumbling and the price of gold climbing.
The test will be President Trump’s trade war. Is it a bluff to soften the resolve of China and the European Union (EU) in eventual negotiations? Or has Trump truly decided to bring back the mercantilism of the 17th century?
While bluffing (that seems to be one of Trump’s skills) could give Trump an edge in trade negotiations, the president has used that technique too often and in too many contexts for it to keep working.
A False Sense of Fiscal Relief
The EU needs stability, and it has struggled to find it. If Trump is playing games, sooner or later, like the boy who cried wolf too many times, he will be called out.
Moreover, Trump has been leading with an eye to the 2018 midterm elections. He needs to deliver on as many of his campaign promises as possible. In theory, those promises incline toward sustaining gold prices more than they do stocks.
Trump’s tax cut was a major campaign item. And Trump (partly) delivered. He certainly made it more convenient for the already-rich to continue investing in stocks. But in so doing, Trump has also put the U.S. national debt in further jeopardy.
Trump’s much-touted infrastructure investments have not materialized yet. Those were intended to improve transportation and logistics in the U.S., lowering costs for all businesses and creating jobs for thousands of Americans.
Rather, the rich have been getting richer thanks to Trump’s tax cuts. The military, with a budget of well over $700.0 billion, has also attracted more taxpayers’ funds.
Gold Prices Should Have Risen on Geopolitical Risk Alone
Trump has ensured that there are sufficient international tensions to keep defense stocks in bullish territory.
The North Korea summit and talks represent a threat to that narrative. Yet, they can always be prolonged to keep the tensions high.
Nonetheless, there’s always the Middle East, in terms of global tensions. Trump has done a phenomenal job in that respect. From an almost-neutral stance, Trump has resurrected the Iran threat, scrapping the Iran nuclear deal.
That deal obliged Iran to disclose any of its nuclear research activity, and it served as an insurance policy against the proliferation of atomic weapons in the Middle East.
The opposite scenario is now true. Iran has become an enemy again and, sooner or later, it will be the direct or indirect target of a military campaign aimed at undermining its government.
Meanwhile, the Saudis are apparently seeking help from Israel in building nuclear weapons. (Source: “Israel ‘is selling nuclear information’ to Saudi Arabia, Middle East Monitor,” Middle East Monitor, May 31, 2018.)
The international framework, North Korea notwithstanding, is ripe with pitfalls and tensions. Geopolitical risk has reached fever pitch levels, with potential for far more dangerous temperatures.
Gold prices should reflect these geopolitical risks. Instead, these conflicts no longer suffice when to comes to strengthening the price of gold.
Have Investors Simply Ignored the Risk Factors That Favor Gold?
The Trump tax reform and its alleged effect on consumers, the stronger dollar, and the general expectation that the stock market will hit more record highs appear to have turned investors off gold.
Overall, investors have developed the idea that the price of gold lacks a strong enough catalyst for a substantial increase. But investors are sometimes (often, in fact) blind.
Gold prices should have continued along a rising curve since last January. If anything, consider the price of gold as an invitation to acquire more of it, ahead of the soon-to-arrive time of reckoning.
The trade wars with the Europeans and Chinese, perhaps not immediately, will expose the weak foundations of the Trump economy. Specifically, the global trade aspects of Trump’s economy.
Commercial and Political Isolation
As Trump pursues commercial and political isolation, America needs a somewhat weaker dollar. As the United States appears intent on moving toward a post-World Trade Organization (WTO) world, the price of gold can only reach its highest level in years.
Certainly, a gold price of $1,400–$1,500 per ounce is more than plausible within the present parameters.
The Federal Reserve is in no position to raise interest rates beyond the three hikes that Fed Chair Jerome Powell established when he took office in February 2018.
Trump has launched the first salvo in the trade wars, but Europe and China will put up a fight—especially given the anger over the repeal of the Iran deal and the related punitive policies against EU companies operating in Iran.
The EU, as well as Canada and Mexico, have already responded in a tit-for-tat manner to Trump’s aluminum and steel tariffs.
Moreover, if Trump dares impose tariffs on Chinese goods, he will have raised the cost of living of millions of Americans. That will offset even the meager gains that the average family obtained from the tax cuts.
Angering Rich and Poor Alike
In an economy of stagnant wages, whatever the job gains might be, the ultimate result is growing income inequality.
The idea of relative wealth is always more powerful than that of absolute wealth. People are interested, from a natural evolutionary or psychological perspective, in how much better off they are from their neighbors.
That’s why sayings about where you can find the “greener grass” or how to keep up with the elusive “Jones’s” remain popular.
In that sense, Trump will not only hurt the lower and middle classes; he will hurt the rich because he wants to eliminate one of the most effective markers of the status race with the Jones’s: German cars.
Trump’s trade policies are encouraging a global trade war, the effect of which will be to put pressure against the dollar while boosting the U.S. deficit. At the same time, China, the EU, Japan, and others will be inclined to sell off American debt, which then becomes a weapon at their disposal to fight the battles of this new trade war.
No Winners in a Trade War
It appears that the United States has triggered a trade conflict in which there can be no winners. What could be more worrisome than that for investors?
And what could be better for the price of gold?
Slower trade also implies a considerable drop in demand for oil. The resultant lower oil prices should then contribute to a higher gold price.
If Trump is truly serious about adopting the commercial trade rules he has pushed, the world will find much cause for concern.
All around, Trump has stirred the pot more in the manner of the witches in Macbeth than in the manner of an experienced druid and healer. Nobody knows what the president is really stirring in that pot. But considerable damage to the global trade environment has already been done.
Gold prices will soon reflect this damage by moving higher.