LAWRIE WILLIAMS: Dollar devaluation against gold inevitable – Murenbeeld
With threats and counter-threats, President Trump’s tariff trade war appears to be escalating – primarily with the world’s second biggest economy – China – but also perhaps with the EU and others. The U.S. President is happy to impose tariffs against what he sees as unfair trade practices, but promises severe escalation if counter tariffs are imposed on U.S. exports in return. As Martin Murenbeeld, in our view one of the most prescient of gold analysts, notes in his latest Gold Monitor newsletter, that when the U.S. followed a similar tariff imposition policy back in 1930 during the Great Depression the policy contributed sinificantly to the global economic malaise He comments “Students of monetary history should recall that global growth shrank in the wake of the Smoot-Hawley Tariff Act of 1930, and the US was forced to devalue the dollar against gold in January 1934 with the result that the gold price rose by 70% (from $20.67 to $35.00).” He goes on to say that, under the current Trump policy, the dollar will inevitably have to be devalued as these tariffs and counter tariffs are followed through to their inevitable conclusion. A trade war tends to have no winners.
President Trump, of course, having come through the world of business, feels that these bullying tactics will lead to a climb-down by the U.S.’s trade opponents. But as we’ve pointed out before, global politics does not necessarily follow the same patterns as global business, particularly in the case of China where we see the economy as much more resilient in part due to the much greater work ethic of the population. As Frank Holmes pointed out in a recent article, Chinese engineers often work a 9-9-6 pattern (9 am to 9 pm 6 days a week) to achieve their goals. When I was editing a tunnelling magazine, for example, we noted that German designed tunnelling machines manufactured in China for a Shanghai project were ready in 6 months, whereas their manufacture in Germany would have taken three years. In the event the machines worked well and completed their tasks as efficiently as if they had been manufactured in Europe. This is just an illustration of how quickly things can move in China and that the nation may well be able to absorb the impact of stringent U.S. trade tariffs rather better that President Trump imagines. It’s not exactly a level playing field.
Now it may take time for any such trade war consequences to become fully apparent – in The Great Depression it took four years before the U.S. was forced to devalue the dollar against gold – and the initial impact of a tariff war may benefit some U.S. manufacturers in the short term, although it may also impact those which rely on exports negatively. Hence the recent strength in the dollar and a somewhat mixed reaction in global equities to President Trump's tariff impositions.
Dr Murenbeeld goes on to say that he thus remains confident that the gold price has 'a very bright future' in the medium to long term. He points to themcontinuing build-up in Russian gold reserves, which we reported on a couple of days ago - see: Russia adds another 18.7 tonnes of gold to reserves - a pattern which he feels will be followed suit by other central banks, as a sign of an erosion of the U.S dollar's dominance. This will ultimately damage the dollar's reserve currency role and weaken the dollar against other key global currencies - and against gold!