LAWRIE WILLIAMS: Gold Jumps, Dow crashes as US/China trade war escalates

With the apparent breakdown of U.S./China trade talks on Friday without any agreement, markets were perhaps poised yesterday ahead of a possible China retaliation and this materialised with China retaliating by imposing tariffs of up to 25% on some $50 billion worth of U.S. imported goods and also threatening to cut off U.S. agricultural imports altogether.  True this is a substantially lower figure than the value of Chinese imports into the U.S. which have had 25% tariffs imposed, but then China imports less U.S. goods than America does Chinese ones.  But President Trump may have miscalculated here as many feel that China is less vulnerable to increased tariffs from the U.S. than the U.S. is to Chinese tariffs on U.S. goods and may be more attuned to increasing exports to other nations to compensate.

U.S. importers of Chinese goods will almost certainly have to pass on tariff increases to the consumer and with China close to being dominant in some sectors of the market – notably electronics and other consumer goods – the Trump move may backfire on the U.S. President.  China is probably more capable of replacing U.S. exports from domestic sources rapidly than the U.S. can replace Chinese imports quickly.  Indeed even with 25% tariffs many Chinese electronic products may still be priced below possible U.S. replacements.  In retrospect the U.S. move may prove to be even more counter-productive in that it may well prove to be an incentive for Chinese manufacturers to copy more U.S. goods for its own domestic market than it already does and supposed theft of intellectual property is one of the very things President Trump is trying to bring to a halt through the U.S. tariff impositions.  Thus the opposing tariff and counter-tariff moves may thus exacerbate the problem rather than solve it!

American markets certainly took the Chinese tariff impositions adversely.  Yesterday, the Dow came down over a massive 600 points, the S&P 500 was down almost 70 points and the NASDAQ around 270.  All huge intra-day falls.  The gold price climbed to hit $1,300 an ounce at a couple of points on safe haven demand and although it then came off a few dollars it then moved back up again and closed at $1,299.30, thus being kept below the psychological $1,300 level at the close, but only just  The pgms as industrial metals fell back along with the U.S. equities and the gold price was again approaching that of palladium and looked like it might shortly surpass it again for the second time inside a week, but ended up a couple of dollars short.

European markets also closed lower with the FTSE 100 off almost 40 points and Germany’s DAX down over 180 points.  As noted below a U.S./China trade war does no-one any good.  It has repercussions in seemingly unaffected markets.  Asian markets all fell overnight too.

Whether the tit-for-tat tariff imposition moves will be sufficient to tip the U.S., and maybe the world, into recession is too early to tell, but there have been plenty of warnings that a trade war, however justified it may seem to be in principle, ends up doing no-one any good.  It seems unlikely to prove to be sufficient to re-stimulate the U.S. manufacturing industry and the big danger for the U.S. is that tariff-hit Chinese goods may well just be replaced with similar imports from other low cost manufacturing regions – again mostly Asian – so not helping the U.S. trade deficit situation.  Meanwhile although it may initially be damaging to the Chinese economy, the country’s capability to react extremely quickly to seemingly adverse circumstances, means that it may be less damaged in the medium to long term.  China’s economy is still growing at a more rapid rate than Western ones and the imposition of tariffs on exported goods may just present a minor blip in the country’s growth pattern.

In the U.S., however, if the decline in equities is sustained there will certainly be increased pressure on the U.S. Federal Reserve from the Trump Administration to cut interest rates, thus reversing the recent rises and, hopefully the equities markets falls.  Scope for doing this is somewhat limited given how low interest rates are at present, but any move to cut will be gold-positive as real interest rates would move further into negative territory and the more negative interest rates go the more beneficial it is for gold investment – or so the theory goes.

It will be interesting to see how markets react through the remainder of the week.  Equities may bounce back, but such a bounce could be shortlived and if so gold is likely to breach $1,300 yet again and perhaps this time the breach could be permanent.  Resistance is seen at $1,310 but many analysts see $1,350 as the key and if the gold price can get through that level in the northern hemisphere summer it could be poised for $1,400 and above in the second half of the year.

14 May 2019

About the author

Lawrence Williams

Lawrence (Lawrie) Williams is a well known London-based writer and commentator on financial and political subjects, but specialising in precious metals news and commentary. He is a qualified and experienced mining engineer having graduated in mining engineering from The Royal School of Mines, a constituent college of Imperial College, London - recently described as the World’s No. 2 University (after MIT).

e: lawrie.williams@sharpspixley.com