Small Carrots and Big Sticks

As was widely expected, yesterday President Trump made good on his word to implement an additional $200 billion in tariffs on Chinese goods imported into the United States. In response to his action, the Chinese government added tariffs on $60 billion of U.S. imports. It seems, at least for now, both governments are using big sticks with no carrots in sight.

One major wildcard that was not anticipated was the fact that President Trump levied tariffs at a rate of 10%, rather than 25%. Although President Trump plans to ramp up tariffs to 25% by the end of 2018, initially tariffs levied will begin at 10%. This move seemed to avert major concern, resulting in a strong upside move in U.S. equities with only mild gains in the U.S. dollar and slight losses in gold and silver.

Just after 4 PM Eastern standard time, gold is trading marginally lower with the most active December Comex contract currently down $2.90 and fixed at $1,202.90. Spot gold is exhibiting the same drawdown and currently fixed at $1,197.90, after subtracting a $3.20 decline on the day.

According to the KGX (Kitco Gold Index), today’s marginal decline of $3.20 contains selling pressure which results in a decrease of $1.75 with dollar strength accounting for the remaining $1.45.

With the current trade dispute quickly transforming into a trade war, market sentiment was tepid in terms of a knee-jerk reaction. Because it is widely believed that the United States has less to lose from the current dispute, recent actions have been favorable to the U.S. dollar, and it had a real negative impact on the Chinese Yuan, as well as gold and silver prices.

Although the dispute continues to provide dynamic headwinds for precious metals pricing, today’s selloff in gold and silver were muted at best. It seems as though the market has largely factored in the current trade crisis.

China’s retaliation resulted in a tirade of Trump tweets in which the U.S. president warned China against retaliatory action toward U.S. farmers in the industry by saying, “we will immediately pursue phase three, which is tariffs on approximately 267 billion of additional imports.”

It seems likely that the current trade dispute will get worse before it gets better. Even though President Trump said that “the United States may make a deal at some point with China” and that the United States is always open to talking, it seems at least for now that both countries will continue to use their arsenal of big sticks with no carrots in sight.

Wishing you as always, good trading,