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Why Trade Wars Don’t Matter to the Gold Market

Here you can find a nice chronological list of all the trade threats and actions between the U.S., China, Canada and the European Union. It looks really disturbing, especially in June and July w...

The yellow metal lost its safe-haven status. This is what the analysts are saying as gold prices have failed to increase amid the trade wars with China. Are they right? Why haven’t the trade wars supported the price of gold?

Trade Wars, Making Of

Here you can find a nice chronological list of all the trade threats and actions between the U.S., China, Canada and the European Union. It looks really disturbing, especially in June and July when the trade tensions intensified after some easing in May. In particular, the U.S. tariffs on $34 billion worth of Chinese imports (and vice versa) came into effect.

However, the list is dominated by trade threats, not the real actions. Talk is cheap. We don’t want to downplay the danger. We know the results of the Smoot-Hawley Tariff Act, which raised tariffs on over 20,000 imported goods to record levels, prolonging the Great Depression. We also acknowledge that the rising trade protectionism in the interwar period laid the ground for WWII. As the saying goes, when goods don’t cross borders, soldiers will.

Trade Wars Are Exaggerated

But we are far from that point. First of all, although populism is rising, there is still strong support for free trade. Just a few days ago, the EU and Japan signed a huge trade deal which cut or eliminated tariffs on nearly all goods. As the agreement covers almost a third of the global economy, it’s a really huge deal. And all the fears of trade wars show strongly that the zeitgeist is different than in the 1920s and the 1930s. Even Donald Trump loves trade. Otherwise, he would pull the U.S. out from the WTO or NAFTA!

Second, the scale of the recent actions is, fortunately, moderate. We are very far from high tariffs on over 20,000 goods. Actually, the U.S. tariffs are among the lowest in the world and in the nation’s history. According to the World Bank, the average applied U.S. tariffs across all products, were 1.67 percent in 2016. It’s not much lower than the average rate of 1.89 percent for the EU, as one can see in the chart below.

Chart 1: U.S. (red line) and EU (green line) average tariffs rate (weighted mean, all products) from 1995 to 2016.

US and EU tariffs

Third, tariffs are not as important as in the past. Governments do not rely any longer on tariffs as the source of income. This is why they switched to non-tariff barriers to trade, i.e., trade barriers that restrict the imports or exports of goods or services through mechanisms other than the simple imposition of tariffs. They are more important nowadays than plain tariffs. According to the last WTO report, which covers the mid October 2016 to mid-October 2017 period, “the estimated trade coverage of import facilitating measures is more than two times larger than that of import restricting measures.” Politics is theater.

Implications for Gold

So, it should not be surprising that trade wars have failed to boost the safe-haven demand for gold. Plus, geopolitical events have a poor track-record when it comes to supporting gold prices in a sustainable manner. They can do it, but only by surprise. In the case of trade wars, we have a completely different situation. There was hype in media about the potential danger, something that hasn’t truly materialized in any meaningful way. But after a while, it became clear that the predictions of immediate doom and gloom failed to materialize.

Hence, the initial gold investors’ excitement faded away and they started to focus on other issues. It is an important lesson for precious metals investors: gold reacts strongly to surprising negative events, but not to potential danger exaggerated by the media. People have short attention spans, so when the threat fails to materialize quickly, their switch their attention. Hence, it’s not the case that gold lost its safe-haven status. The whole issue of trade wars has simply been inflated in the media.

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Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.

Thank you.

Arkadiusz Sieron, Ph.D.
Sunshine Profits‘ Gold News Monitor and Market Overview Editor

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