Trade Tariff Stare Down Triggers Gold Rally

(March 23, 2018 - by Gary Wagner)

This week was certainly ripe with major events, each of which has had a direct and immediate impact on gold. However, it was the escalation of trade tariffs proposed by President Trump this week that sent gold prices dramatically higher and equity pricing to its lowest level since November 2017.

An announcement by President Trump that he is proposing new tariffs to be levied against China sent shivers through U.S. equity markets yesterday, resulting in a decline of over 700 points in the Dow Jones Industrial Average. These concerns continued today with the Dow plunging another 400 points and gold gaining $20 per ounce today.

Releasing a Fact Sheet yesterday, President Trump upped the ante by adding direct penalties in response to China’s acts, policies, and practices involving the unfair and harmful acquisition of U.S. technology, as well as practices related to the transfer of this intellectual property. While signing the tariff orders yesterday, Trump told reporters, “This is the first of many.”

This action comes one day after the conclusion of this month’s FOMC meeting in which it was announced that the Federal Reserve would initiate a quarter percent rate hike this month. Fed Chair Powell also stated that they are staying the course in terms of their “Dot Plot” with plans for two more quarter percent rate hikes this year.

The combined result of both actions by the Federal Reserve and the current administration resulted in gold trading dramatically higher, gaining roughly $37 over the last three trading days.

Superpowers Don’t Blink

Whereas the FOMC’s rate hike announcement on Wednesday can be seen as a one and done event, the trade war dispute between the two superpowers is far from over. In fact, many believe it has just begun. It is hard to imagine that either of the two superpowers will back down immediately which suggests that this dispute will continue.

Even as China was issuing retaliatory actions to the tariff levied on steel and aluminum products from China, President Trump was initiating his next salvo with yesterday’s statement and massive tariff proposal. This proposal would impose tariffs on $50 billion worth of Chinese exports to the United States.

China responded immediately in a statement issued by the Chinese Ambassador to the United States. Cui Tiankai had this to say, “We don’t want a trade war, but we are not afraid of it. If somebody tries to impose a trade war on us, we will certainly fight back and retaliate. If people want to play tough, we will play tough with them and see who will last longer.”

China announced further escalation of the trade dispute and immediately outlined new import taxes of its own on products produced in the United States and sold to China worth approximately $3 billion.

According to CNN, Beijing’s retaliation so far has been limited. However, “It’s possible that more measures will be announced when the scale and impact of the latest round of tariffs from Washington become clear. Still, China knows it has a lot to lose if things get out of hand.”

Regardless of whether this week’s actions by the United States and China result in a trade war, one thing is for certain; this issue will not be resolved overnight and could easily fuel a continuation of this week’s rally in gold over the next few weeks. We could see prices move substantially higher and break above the ceiling at $1400 per ounce.