03 Jul What does the US vs. China trade war do to gold?
“A trade war is when a nation imposes tariffs or quotas on imports and foreign countries retaliate with similar forms of trade protectionism. As it escalates, a trade war reduces international trade” (BBC).
The current US-China trade war is shaking the global economy and causing worldwide geopolitical tensions. It was inevitable.
US President Donald Trump started complaining about China’s trading practices before he even took office in 2016. In many of his campaign rallies, President Trump insisted that the US “can’t continue to allow China to rape our country, and that’s what they’re doing. It’s the greatest theft in the history of the world.” President Trump has made many similar comments about China’s trade practices.
So, what is this trade war all about?
President Donald Trump wants to reduce the $621 billion U.S. trade deficit. It’s been the world’s largest since 1975. Reducing the deficit is part of Trump’s strategy to create more jobs.
Most of the U.S. deficit results from Americans’ enthusiasm for imported consumer products and automobiles. In 2018, the United States imported $648 billion in drugs, televisions, clothing, and other household items. It only exported $206 billion of these consumer goods. That alone added $442 billion to the deficit.
The trade war timeline –
By 2017, the US had already launched an investigation into Chinese trade policies. On July 6, 2018, for the first time, the U.S. imposed tariffs on Chinese goods. Since then, the two parties retaliated in several rounds if tariffs.
Did the tariffs imposed by both the US and China have any immediate effect on the price of gold? We decided to check. Here’s a step-by-step breakdown:
1. March 23, 2018: The US imposes a 25 percent tariff on all steel imports and a 10 percent tariff on all aluminium imports (certain countries exempted).
Gold price, March 23, 2018: USD 1,347/ozt.
The next 3 days (March 23-26, 2018): USD1,330/ozt
2. April 2, 2018: China imposes tariffs (15%-25%) on 128 products (worth US$3 billion) including fruit, wine, seamless steel pipes, pork and recycled aluminium in retaliation to the US’ steel and aluminium tariffs.
Gold price, April 2, 2018: USD 1,327/ozt.
The next 3 days (April 3-6, 2018): USD1,333/ozt
3. July 6, 2018: The US implements its first China-specific tariffs: US Customs and Border Protection begins collecting a 25% tariff on 818 imported Chinese products valued at US$34 billion.
Gold price, July 6, 2018: USD 1,255/ozt.
The next 3 days (July 7-10, 2018): USD1,257/ozt
4. August 3, 2018: China announces a second round of tariffs on US products: In response to potential US tariffs on US$200 billion worth of products, China’s Ministry of Commerce proposes a range of additional tariffs on 5,207 products originating from the US (worth US$60 billion)
Gold price, August 3, 2018: USD 1,214/ozt.
The next 3 days (August 4-7, 2018): USD1,210/ozt
5. August 23, 2018: The US and China implement a second round of tariffs
US: implements a 25% tariff on 279 goods originating from China (worth US$16 billion).
China: implements retaliatory 25% tariffs on 333 goods originating from the US (worth US$16 billion)
Gold price, August 23, 2018: USD1,185/ozt.
The next 3 days (August 24-27, 2018): USD1,211/ozt
6. September 24, 2018: US and China implement a third round of tariffs
US: implements tariffs on US$200 billion worth of Chinese goods, bringing the total amount to US$250 billion.
China: responds to US tariffs by implementing tariffs on US$60 billion worth of US goods.
Gold price, September 24, 2018: USD1,199/ozt.
The next 3 days (September 25-28, 2018): USD1,182/ozt
7. May 10, 2019: US increases tariff from 10 percent to 25 percent
US increases tariffs on US$200 billion worth of Chinese goods from 10 percent to 25 percent, as the US and China fail to reach a deal following the end of the first day of the eleventh round of high-level trade talks.
Gold price, May 10, 2019: USD1,286/ozt.
The next 3 days (May 11-14, 2018): USD1,299/ozt
8. June 1, 2019: China increases tariffs on US$60 billion worth of products
Tariffs of 25%, 20%, and 10%, which were first announced on May 13, 2019 are now in effect on US$60 billion worth of American goods exported to China.
Gold price, June 1, 2019: USD1,305/ozt.
The next 3 days (June 2-5, 2018): USD1,330/ozt
We could find a correlation between the tariffs imposed and the price of gold, however, it was not immediate during the days after the tariffs were imposed. At the beginning of the US-China trade war, gold’s price wasn’t affected significantly, but as the trade war began to escalate and deepened, concerns over the impact on the global economy intensified. Each tariff seems to be causing a rally in the price of gold, as investors are getting more nervous and therefore are moving to gold as a safe haven.
Once again, we see that physical gold is the asset investors turn to in turbulent times, when there are economic uncertainties and there is a need for a real store of value.
Even central banks around the world are readjusting their foreign exchange reserve mix in favor of gold for safety and strategic reasons. In Q1 2019 central banks rushed to purchase gold. It was the largest reserve increase in the last 6 years. Mandated with the financial stability of their countries, central banks are relying on the world’s oldest insurance against uncertainty: gold.
As we anticipated, after the G20 meeting last weekend in Osaka – the agreement between presidents Trump and Xi to restart trade talks brought a correction to the price of gold, but it still reflects the major concerns of investors worldwide. Strategically, there is no substitute to holding physical gold, in a private environment, away from the financial system.
To learn on where we believe gold is heading, please see my interview to Bloomberg from last Friday: https://jrotbart.com/the-bloomberg-interview-where-are-gold-prices-heading-to/
J. Rotbart & Co. offers clients the choice to invest in diverse precious metals products and bullion storage.