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Threat of trade war sees investors turn to gold

Gold bars.

Investors are looking to the safety of gold as outlooks on growth and the dollar wobble following reports of a brewing trade war triggered by President Trump’s tariff announcement

A proposed trade war resulting from US tariffs on metal imports could benefit gold, as investors worry about the impact of such measures on the global economy. US president Donald Trump’s ‘America First’ program would see a tax of 25% on imports of steel and aluminium in a bid to aid American firms who seem themselves as victims of Chinese market ‘dumping’, where the abundance of cheaper steel from overseas suppresses prices at home.

Following the announcement on tariffs, gold rose 0.4% to $1,326.76 per ounce on Monday morning. Earlier the yellow metal had reached $1,327.86, its highest price for almost a week. “Any escalation of trade wars will significantly dent the US dollar appeal, weigh negatively on US assets such as bond and equities and make gold the go-to hedge against rising US fiscal and political vulnerabilities,” said Stephen Innes, APAC trading head at OANDA.

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“The area of $1,300 will remain an important support and it does not seem likely to fall below this area in the next few days, unless the US dollar could manage to strongly recover on the currency market,” Carlo Alberto De Casa, chief analyst at ActivTrades and technical analyst for La Stampa, told Glint. “From a technical point of view the main trend remains lateral – positive, with a bullish signal above the resistance area of $1,340, even if the real barrier for further raises is placed at $1,360/1,370 – the peak reached in February.”

Tariffs on foreign competitors will benefit certain US industries who welcomed the move as fair, last week: “We are not protectionists, we want a level playing field,” David Burritt, chief executive of US Steel, told reporters. However, it is also highly-likely to now trigger a trade war with other trading blocs, notably the EU and China.

“We strongly regret this step, which appears to represent a blatant intervention to protect US domestic industry and not to be based on any national security justification,” said Jean-Claude Juncker, the European Commission president; adding the threat: “The EU has been a close security ally of the US for decades. We will not sit idly while our industry is hit with unfair measures that put thousands of European jobs at risk.” The EU has indicated it would seek to impose a 25% tariff on US imports worth  $3.5 billion in retaliation, including a tax on Levi’s jeans.

China also expressed disappointment. Hua Chunying, a foreign ministry spokesperson told reporters that if other countries follow in the steps of the US, it would harm global trade. “China urges the US to abide by multilateral rules and to make contributions to the trade and economic world order.”

Consumers are often those who pick up the costs of trade wars. This time they may end up having to pay more for products such as fizzy drinks in the US, as they use aluminium in their cans, or for bourbon whiskey if in the EU. Such squeeze comes at a time of pressured incomes and rising inflation. Additionally the UK could suffer significant loss of trade, having been warned there can be no exemptions to the tariffs. The policy could also end up hurting US workers: George W Bush’s tariffs in 2002, are estimated to have cost 200,000 jobs due to higher steel prices.

Following Trump’s announcement the dollar slipped off a six week high and state Federal Reserve (Fed) officials indicated their reluctance to see a trade war that would likely impact broader US economic growth. Jay Powell, the Fed chairman, told a Senate hearing on Thursday he though “the tariff approach is not the best approach”.

The Financial Times reported Joe Bruseuelas, chief economist at accountancy firm RSM, as saying the Fed could end up being forced to make interest rate rises sooner than it wants to. “You are going to see a greater distortion from this because it will ripple across the industry.”

In such a situation gold is likely to benefit as inflation bites and growth is impacted, exposing those with cash savings. The recent market volatility has also suggested equities could lose significant value this year.

New governments in Germany and Italy

The euro might also see its prospects hampered by the uncertainty emanating from the Italian election. However, the agreement of a new governing coalition in Germany has been seen as good for markets. “The reaction of the financial markets to the news in Italy is certainly mitigated by the German vote, with the SPD accepting the new Grosse Koalition with Frau Merkel,” said ActivTrades’ Carlo Alberto De Casa.

“The recovery of the euro has been reset, but the rebound of gold is continuing with the spot price staying above $1,320. It’s been a combination of news items related to aluminium, steel duties and, crucially, the ungovernability of the Italian Parliament which is pushing up the price of the yellow metal.”

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