White House trade policy news opened this week with a Trump Administration threat to pull out of a trade deal with South Korea. This follows last week’s trade news, a report by Axios quoting President Donald Trump railing at his senior staff in the Oval Office about tariffs. “I want tariffs. Bring me some tariffs!” he reportedly vented to General John Kelly, adding that, “The Chinese are laughing at us."
If Trump’s policies of economic nationalism are implemented, then this is very bullish for gold.
Why are tariffs and other trade barriers bullish for gold? First, tariffs if implemented will weaken the dollar, as trade barriers restrict the amount of goods that can be traded for dollars, lowering the dollar’s purchasing power. A weaker dollar is bullish for gold. In simple mathematical terms as well we can see why tariffs will weaken the dollar. Tariffs are designed to narrow trade deficits. Trade deficits are paid for by exporting dollars. The more dollars exported, the fewer dollars remain within American borders, the fewer dollars available to bid up prices within the US. The net export of dollars then helps keep dollar prices low within the US.
Cutting down those dollar exports by introducing trade barriers increases the supply of dollars within US borders and will push up consumer prices from the dollar supply side. Tariffs would also push consumer prices higher from a goods supply side. Fewer imports means fewer goods in the country, which pushes up prices as well. Even though this cannot be considered “price inflation,” as higher-cost goods is not a monetary phenomenon, these higher costs will nonetheless be factored into the government price inflation statistics, making inflation look higher than it actually is and adding more fuel to the precious metals fire.
Beyond that, enacting tariffs could easily cause retaliation by other countries, damaging American exports and specifically hurting the firms that tariffs are meant to protect. The result would be at once increasing the supply of dollars within American borders without putting much of a dent in the trade deficit since exports would decrease as a result of any retaliatory moves. Both imports and exports would decrease, lowering economic activity on both sides of the coin. This is also bullish for gold.
Retaliation could also take the form of the selling of US Treasuries by the Chinese, something they have already been doing since 2014 in an effort to prop up the yuan and stem capital flight.
The selling of Treasuries would push interest rates higher, forcing the Federal Reserve to react by creating still more dollars in order to balance out the move and keep interest rates steady and within their target range. It would be a form of quantitative easing without the official announcement.
All of this is bearish for the dollar from a fundamental perspective, and therefore bullish for gold. Meanwhile, from a technical perspective, it certainly looks like the dollar is in serious trouble, having breached three-year lows, and gold is already reacting. The dollar has already fallen markedly since Trump’s election and continues to do so now.
Multiyear support levels have already been breached. If there is no convincing bounce, there is no telling how far the dollar may fall or how fast. Precious metals traders may have already picked up on this, with base metals confirming. Copper, for example, surged on the week of Trump’s election (see below) and is now trading at 3-year highs. Commodity price spikes, especially in the base metals sector, are indicative of higher price inflation in the near future.
It remains to be seen how far Trump wants to take his tariff policy, or how far he will be able to do so. As for kinds of tariffs, the most bullish tariffs for gold may not be those enacted against China, but against OPEC and oil imports. While tariffs against oil imports do not seem to be an especially high priority for Trump at this point, he has railed against OPEC in the past and he may believe that imposing tariffs on oil imports will stimulate domestic oil production. It is worth analyzing how an oil tariff would impact the gold price as well, even if such tariffs are less likely.
Why tariffs on oil imports would be even more bullish for gold is that the backbone of dollar strength since 2014 has been the oil price decline. Since OPEC oil can only be traded with dollars, oil and the dollar trade inversely. Choking off oil imports would of course decrease the supply of oil into the US, pushing the price of oil artificially higher, which could cause the dollar index to fall back down to levels before the late 2014 oil price decline.
It is clear that Trump wants tariffs, and that this is a top priority for him. Regardless of which tariffs he may impose, they are all bullish for gold because they will lower the supply of goods and services into the US on the one hand, and increase the supply of dollars on the other.
Disclosure: I am/we are long GDX, GDXJ, SIL.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.