The U.S. Gains Nothing From a Trade War, But It Works for the Gold Price
President Donald Trump has decided to impose tariffs on aluminum and steel that the U.S. imports from the European Union (EU) and Canada. This should eventually strengthen the gold price.
The intended beneficiaries of Trump’s new trade wars are Republicans running for seats in Congress in the 2018 midterm elections. A higher gold price will result as a fortuitous side effect.
President Trump appears to be fulfilling electoral promises. There’s something commendable there; he’s that rare politician who believes it’s important to fulfill the mandate his voters expect.
Yet, many of the promises are the equivalent of an adult offering pounds of sweets, ice cream, candies, and unlimited video game time to spoiled and bratty children.
The Truce Is Over
Whatever commercial truce Trump and America’s European “allies” achieved in the past weeks has ended.
The Europeans—and even the so-called “Trump whisperer,” Canadian Prime Minister Justin Trudeau—have failed to persuade Trump. The trade barriers are up.
Trade tariffs of 10% and 25% on steel and aluminum imported from the EU, Mexico, and Canada were applied on June 1, 2018.
In that sense, Trump has proven to be a true populist. He does what the people want—or think they want—rather than what the country needs. The EU and Canada have no choice.
The Financial Storm Will Drive Investors to Safe Havens Like Gold
It might create a storm for the financial markets, but it will drive many investors toward precious metals and other safe havens. Thus, eventually, Trump’s policies—if they may even be called as such—will drive the gold price significantly higher.
For the time being, Trump has directed his tariffs and duties toward aluminum and steel. It means he has avoided targeting China. Instead, he has handed the hot potato of global commerce to America’s key allies.
This is the second major slight against America’s allies that Trump has pulled in as many months.
The first was pulling out of the Iran nuclear deal, which has left Europeans, already dealing with deep internal fissures of their own, scrambling to preserve their valid economic interests in Iran.
The question is whether Trump—and his allies in Congress—appreciate the damage that the odd “keep your friends close and your enemies closer” foreign and trade policy strategy does to U.S. power.
Who Can Trust America Now?
Canceling deals, flip-flopping on North Korea, and playing games with global trade won’t help American prestige. And prestige, as much as the military hardware and the uniformed marines, plays a primary role in securing American interests around the world.
In a sense, Trump has isolated the United States from its friends—albeit, with the exception of Israel.
The question, therefore, is almost rhetorical. Given that the White House knows that the EU will retaliate (Canada already has announced its countermeasures), how and where will America continue to exercise its economic dominance?
The alleged rise of inflation—or rather, the inflation expectation—has propped up the U.S. dollar in 2018.
This has hurt the gold price, because, like zombies, it seems that investors do exactly what the economics textbooks tell them to do.
Dutifully, like good disciples everywhere, they have been reluctant to buy precious metals and commodities. And the gold price has suffered.
Yet, if investors looked beyond the “Zombie’s Manual to Investment” and started to think a little, they would notice that Trump has been busy enveloping the United States in a bubble of hostility.
Trump Has Gone Well Beyond Isolationism
What Trump is doing goes beyond isolation. Trump has used nothing short of economic threats against America’s best friends. He has taken a real shining to Germany and its Chancellor Angela Merkel.
Such is the apparent animosity that Trump has threatened to ban imports of Mercedes Benz cars into the United States.
And, why stop at Mercedes Benz? He will also ban BMW, Porsche, Audi, and—why not—Volkswagen. (Source: “Trump Plans Total Ban on German Luxury Carmakers From US Market,” Zero Hedge, May 31, 2018.)
Perhaps Trump doesn’t know that all major German auto groups—for whom the American market is essential—build many models in the United States. Banning them means forcing several of his potential voters out of work.
Moreover, as a seasoned real estate and business tycoon, does he expect the Germans and Europeans to stay put?
General Motors Company (NYSE:GM), Ford Motor Company (NYSE:F), Jeep (owned by Fiat Chrysler Automobiles NV (NYSE:FCAU)), Harley-Davidson Inc (NYSE:HOG) have significant markets in Europe. So do Microsoft Corporation (NASDAQ:MSFT), Apple Inc. (NASDAQ:AAPL), Amazon.com, Inc. (NASDAQ:AMZN), and Google—now known as Alphabet Inc (NASDAQ:GOOG).
The EU has sufficient leverage to make Trump think twice about his tariffs. Then there’s the North Atlantic Treaty Organization (NATO).
The more impositions that the U.S. administration places on the Europeans, the weaker NATO becomes—ruining markets for American weapon manufacturers as well.
Look Out for the Gold Price
And this is where the gold price comes in. The rest of the world has already started to function as if the United States doesn’t count.
The EU continues to deal with Iran. Some oil companies, like Total SA (NYSE:TOT), have left. But, promptly, the Chinese have taken their place. Europe is also seeking better ties with Russia.
The 2018 FIFA World Cup, sporting event though it may be, may prove an ideal venue for Moscow to prove it’s a more reliable partner than Washington on anything from pressing economic to diplomatic issues.
Sooner, rather than later, American businesses will suffer significant losses in the face of the isolationism that has fueled the tit-for-tat trade war.
And while Trump intensifies trade hostility, he has also pushed U.S. military expansion.
And, then, the already-below-expectations economic growth will reveal the sad fact about the much-touted inflation.
It’s not really an issue, because, as the first-quarter gross domestic product (GDP) rate of 2.2% showed, economic growth has fallen below expectations.
The oil price has gone up. That adds to the financial burdens of families and businesses. Higher oil prices are a growth killer.
The Fed Is Basing Its Interest Rate Policy on the Wrong Inflation
The kind of inflation that the “Chicken Littles” are screaming about is not the kind that warrants raising interest rates.
In this less-than-inspired economic context—in which the tax cuts have created the impression (but not the reality) of prosperity—Trump has blown headwinds against the dollar.
The Federal Reserve will soon realize there’s no need to raise interest rates. At least, if it does raise rates, it’s not because the economy is “overheating.”
It’s even possible to establish the possible timing of the reversal of the current dollar/gold price relationship. That is, the lower dollar/higher gold price formula.
That date is November 6, the day of the 2018 midterm elections. And the areas of the United States most engaged in producing steel and aluminum happen to be strategic. That’s where there are many constituencies who favor Trump and conservative Republicans.
It’s important because many of Trump’s current and seemingly illogical policies only appear to be the random ruminations of an inept amateur political player.
On the contrary, Trump has shown considerable skill, and the “Tea Party” current of the Republican Party will likely dominate the midterms because of the geopolitical and global trade situation he has created.
The countries affected by Trump’s tariffs promise reprisals.
Trump Is a Gambler
President Trump may have calculated that the legal reprisals will likely favor the EU, Mexico, and Canada in various international organizations and courts from The Hague to the World Trade Organization (WTO).
He may also have calculated that the targeted countries’ reprisals, whatever they may be, will take time to be studied. And decisions may take months—if not years—to come.
The president will, therefore, hit one for his party at the midterms and then allow the situation to resolve itself back to something resembling the pre-June 1, 2018 status quo.
But the damage has already been done and the tariffs are merely a footnote. Sooner or later, the markets will start to reflect the accelerating erosion of American prestige. And the dollar will start to lose its upward momentum, favoring the gold price.