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LAWRIE WILLIAMS: Trade wars could buoy the gold price – METALS FOCUS

In its latest weekly newsletter London-based precious metals consultancy, Metals Focus, takes a look at the likely impact of a global trade war developing and its likely effects on the price of gold.  So far this year any early growth in the gold price has been negated by recent downwards moves and, year to date, gold has actually fallen in price after a promising first couple of months.  The consultancy puts gold’s lacklustre performance year to date down to subdued volatility in global equity markets and stronger perceived economic growth and subdued inflation in the U.S in particular, despite what it sees a chaos in the Trump Administration. In light of this, it reckons that the safe haven characteristics of gold have not emerged.

Even some potentially dangerous geopolitical issues seem to have dampened down – notably with respect to the Korean peninsula – a potential flashpoint seemingly made ever more dangerous by escalating rhetoric on both sides.  This seems to have eased off for the time being although there are still a number of other potential global confrontational situations which could blow up into something more serious and bring safe haven investment back into play.

However, Metals Focus does see a potential driver for gold emerging with a significant rise in global trade tensions given President Trump’s views on the U.S. trade imbalance.  The beginnings of such a trade war are already emerging with the world’s largest economy starting to impose some swingeing tariffs on imports of steel and aluminium.  Most observers see these as just the start of something which could become much more significant given the size of the U.S. trade deficit with the rest of the world and the U.S. President’s perhaps over simplistic views on trying to eradicate it.

For now, notes Metals Focus, the imposition of tariffs on steel and aluminium in itself is not a key concern for markets given that China’s shipments to the US of both commodities is relatively small. In each case, Canada is the biggest exporter to the US and is currently exempt due to the ongoing negotiations concerning the North American Free Trade Agreement.

But, looking further ahead, a full-blown trade war, even though it may be unlikely at this point in time, could have wider implications for global markets and for the gold price.  President Trump’s propensity for leaping into major policy decisions, amid ignoring advice from his executive team, could lead to more rapid policy adjustments than many perceive.  Indeed the President appears to be packing his advisory team with like-minded individuals while dismissing those who might try to exert a moderating influence.

A tariff war would likely trigger retaliatory action by the U.S.’s trading partners  which Metal Focus sees as potentially weakening the dollar and benefiting gold. This, the consultancy avers, is because it would lower U.S. exports and increase the already very substantial trade deficit, which will have to be funded by additional debt.

Second, rising tensions could damage global trade and, in turn, act as a headwind against any continuation of global growth.  The recent strength in global equity markets has also been partly driven by global economic performance and so a slowdown could derail equities, push up volatility and in turn, benefit gold prices.

Third, muted economic growth would most likely result in a slower pace of Fed rate hikes. At present, the markets have generally priced in three rate increases in 2018 and next week’s FOMC meeting deliberations are eagerly awaited by the markets for the latest guidelines on this. A shallower rate hike trajectory might be seen as constructive for gold, although how much impact small rate hikes have on the yellow metal remains a contentious matter.  In theory higher rates tend to suggest a stronger dollar and a lower gold price but in practice this has not proved to be a simple correlation and gold has often risen despite rate increases.

Metals Focus thus reckons that on balance, a key issue to watch from a trade standpoint will be what action the US takes, particularly towards China and the consequences that follow from this. The uncertainty arising, however, could well mean that a corresponding risk-premium could benefit the gold price ahead.

21 Mar 2018

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

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