The gold price, historically, has been the most reliable barometer of market sentiment in terms of geopolitical stability expectations. It has also been a pretty reliable indicator of excess credit and capital in the world’s financial system. Or it used to be, until imbalances in futures market regulation created opportunities for the biggest participants in those markets to push spot prices wherever they like. It is for this reason that futures market volumes massively exceed physical market volumes, or even what exists in terms of physical gold in the world.
Be that as it may, gold prices still manage to express rising sentiment with breakouts to the upside and downside. Currently with the price having traded consistently higher on a daily basis since its 2016 low of US$1,124.49 to today’s US$1,180, up about 5 per cent. The fact that gold is experiencing increased buying as we near the inauguration of Donald J. Trump on Jan. 20 suggests that the post-election effusiveness of markets may in fact have been misleading.
Or, as is more likely the case, they are an indication of growing trepidation as the anti-China rhetoric from Mr. Trump is ratcheted irrationally higher.
The latest exchange between Trump and China is the most text-book case of trash talking and bravado more appropriate to a junior hockey rink or playground. The chances that this ends in an adult-style discussion diminishes with each volley. And thus, with the darker alternatives looming larger in the range of possibilities, gold drives higher.
Trump’s No. 1 strategy for Making America Great Again, as far as it exists, revolves around heaping tariffs onto imports so that American goods are cheaper. Considering the vast range of items that now originate in China on store shelves in the U.S., the opportunities for tariffs are vast. The only problem, however, is that many of those items have no American-made counterpart, and so the tariffs will likely have the opposite effect.
On the other hand, China, which could reasonably be expected to retaliate in kind, also has a large but smaller range of U.S. made items that it can choose to slap tariffs on, and in China’s case, there is almost always a Chinese-made alternative. Thus, the damage possible to China by this thinking is likely outweighed by the damage to U.S. interests.
This means that should Trump pursue this approach, which increasingly appears unavoidable, he may find himself on the back foot, defending an indefensible strategy, and undermining his own credibility.
Which would likely result in other, less-than-thoroughly thought-out reactions.
At any rate, this will be good for Canada, as a global miner and explorer of gold and precious metals. If protectionist tariffs are ultimately abandoned as ineffective and counterproductive, the result will likely be greater reliance on fiscal stimulus in the form of additional infrastructure investment, and tax reduction. More infrastructure implies more copper, zinc, iron, nickel and aluminum, all of which benefits Canada.
While this superficially looks like a U.S.-China trade war will be good for Canada, the damage that would be done to investor confidence and sentiment has the potential to destroy any advantage gleaned from that outcome. So while all we can do in Canada is observe and comment, let’s hope that the antagonists tone down the rhetoric. In the meantime, maybe we should buy a little more gold.