The exorbitant burden

"All foreigners are out to screw us and it's our job to screw them first." Those words may have come from President Trump but in fact were said by John Connally, the Treasury Secretary of an earlier President, Richard Nixon. Connally imposed a 10% surcharge on imports - a tariff which, he said, was not an attack on other nations. He told an audience at New York's Economic Club in November 1971 "we are not asking them to change their way of life. We are asking them to be fair and reasonable with us." President Trump's Treasury Secretary, Scott Bessent, has said "we are going to have some kind of a grand global economic reordering...I'd like to be a part of it."

There's nothing new under the sun. So we should also remember that a few days after Connally's words came the 'Nixon Shock'. In 1971 the Dollar was very overvalued, meaning imports were very cheap and exports expensive. The US was losing its competitiveness; Nixon ended the Dollar's peg to gold. Nixon wanted to devalue the Dollar without causing a market ruckus. He succeeded.

The same trick

As any magician will tell you, it's very difficult to fool the same audience twice. President Trump's team is trying to repeat the Connally/Nixon feat, but the greater sophistication of financial markets, plus the dramatic technological changes fifty years on is getting in the way. "A controlled disintegration in the world economy is a legitimate objective in the Eighties." Paul Volcker, one of Nixon's advisers and the man appointed by President Carter as head of America's central bank, the Federal Reserve, could get away with that kind of statement in 1971. Nixon got away with his apple-cart upset thanks to bipartisan passivity. That's nowhere to be seen today. Instead there is more or less universal consensus that global economic growth will be anemic at best, as the world tries to cope with the latest tariff war.

Different but the same

The world may have changed beyond recognition since the 'Nixon Shock' but essentially the US is facing the same problem - an overvalued fiat currency, by almost 40 years (and the most ever against Canada's), against those of its main trading partners. The White House wants to see a weaker Dollar but without importing inflation or, perhaps more crucially, weakening the Dollar's global hegemony. The world has wanted the Dollar for years, and that 'exorbitant privilege' has given the US its status as the leading political and economic power, which President Trump wants to preserve.

He is trying to square a circle.

And the result is...

Open to question. Orthodox economics says that a weaker fiat currency, particularly in countries dependent on imports (such as the US) is likely to spell higher inflation, as the cost of imported goods and services goes up.There are other likely knock-on effects, such as a loss of status, diminished influence, a loss of credibility - and a probable rise in interest rates, as the central bank responds to the higher inflation rate.

If these side-effects come to pass they will no doubt have political repercussions that are uncomfortable for President Trump. But what is important here is the impact on gold. The spot Dollar price of an ounce has touched a new record of $3,500 - a rise of 33% since the start of the year. Many analysts attribute this astonishing bull run to the uncertainties and policy chopping-and-changing from the White House. It's important to try to cut through the froth and take a long view. On this basis the price blips up and down should be ignored. In the long term it's the ambition of the US administration to deliver a weaker Dollar while fending off the bad things (inflation, distrust, higher interest rates and so on) that may bring. A weaker Dollar will mean the Dollar gold price of gold will continue to rise. Eventually the Dollar will lose its privilege, as have all previous international reserve currencies. That's the fate of all fiat money. It's not the same for gold.

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