It’s On - Whether You Call It a Trade War or a Trade Dispute

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According to the Oxford dictionary, a trade war is “a situation in which countries try to damage each other's trade, typically by the imposition of tariffs or quota restrictions.”

The tariffs imposed by President Trump on steel and aluminum imports and the response by the Chinese government of tariffs to be levied on U.S. goods is an exact match to the definition of a trade war. Whatever you call the current trade dispute between these two superpowers, one factor is undeniably clear: there are profound and immense repercussions that are now emerging in both the equities markets and the safe-haven asset class.

As reported today in BloombergMarkets, “In a two-week span, President Donald Trump ordered up an array of tariffs against numerous countries, blocked Chinese takeovers of U.S. companies, and sought new restrictions on future Chinese investment. China responded with tariffs of its own on imports of 128 U.S. goods. Economists are warning that the world is on the verge of an all-out trade war, featuring tit-for-tat reprisals, heated rhetoric, and appeals to the World Trade Organization, which may be ill-equipped to respond.”

If history has taught us anything, it is that both sides of a trade war dispute lose. In fact, one of the darkest points in history for the United States, the Great Depression, was deepened by tariffs imposed in 1930 by the U.S. Congress. The tariffs imposed to protect American farmers resulted in a breakdown in global trade.

On March 8, President Trump announced his plan to impose a 25% tariff on steel along with a 10% tariff on aluminum. As reported by Time, “President Donald Trump ordered steep new tariffs on steel and aluminum imports to the U.S. on Thursday, vowing to fight back against an ‘assault on our country’ by foreign competitors.”

Over the last three weeks, U.S. equities have fallen dramatically, with today’s decline of 459 points taking the Dow Jones Industrial Average to 23,643 points. Considering that the Dow closed at 25,337 points on March 8, the trade war dispute has resulted in a significant selloff in U.S. equities.

Gold, however, lagged behind the U.S. equities selloff and continued to trade under pressure up until March 19 when it traded to a low of $1,306 per ounce. From that point on, gold prices spiked to $1,356 before trading under pressure last week to close at approximately $1,321 on Friday. That all changed today when China announced a set of tariffs to be imposed on U.S. goods as a direct retaliation for U.S. tariffs imposed on Chinese steel and aluminum imports.

Currently, gold is trading up by $18 on the day (June 2018 futures contract) at $1,345.30. This dynamic rise is 100% attributable to buyers bidding up the precious yellow metal, with the U.S. dollar currently trading, in essence, unchanged on the day.

According to the KGX (Kitco Gold Index), spot gold is currently trading up $15.70 on the day, fixed at $1,340.70. On closer inspection, buying has resulted in a gain of $16.40, with a slightly higher U.S. dollar taking away $0.70 of value resulting in today’s current pricing.

Although we can expect increased volatility and price swings as statements emerge from both superpowers, it is quite evident that the current trade dispute is far from over.

If this current trade dispute has a similar outcome to other trade wars in the past, no country will win, and there could be a profound global impact. These events could undoubtedly fuel a major rally in gold as a safe-haven asset.

Wishing you as always, good trading,

Gary S. Wagner - Executive Producer