Trade Wars Bring Massive Uncertainty to Markets

April 18, 2018

The markets are still reeling from the Trump Administration’s latest actions targeting trade with China. Is this all a global game of chicken? Is there a method to his madness? The negotiations all seem to come down to protecting US intellectual property, which is at the crux of a lot of American big business these days. We invent it, China manufactures it. And if there is no protection of our IP, we hold no economic cards. They can copy anything we dream up and we lose. But how to correct the imbalance? Are tariffs on steel and aluminum the way to go?

China has responded by imposing steep tariffs on US goods like cars, chemicals, frozen pork, wine, fruit and nuts. What will the next move be?

Where does Trump go from here?

Prognosticators are all thumbing furiously through their copies of “The Art of the Deal” trying to guess what Trump will do next. But with Mr. Free Trade Himself, Larry Kudlow newly at the economic helm of this administration, starting a trade war was the last thing anyone could have predicted. It’s the wild west, economically speaking. And that is making investors nervous - and nervous investors usually flee to safety.

Inflation Nightmare?

If a trade war escalates, so will prices for precious metals. This explains gold’s recent breaking above the important $1300/ounce level of late, and staying there pretty consistently.

A trade war and protectionist policies will hamper economic growth across the board, like an albatross around the economy’s neck. A lot is at stake with such a major trading partner as China on the line – about $650 billion actually. Limiting trade with China would greatly exacerbate inflation and dampen the enthusiastic stock market. It could very well be the gunshot needed to unleash the avalanche of inflation that has been sitting idle on balance sheets, as companies and banks tap into these hidden reserves to stay afloat.

Gold Miners' Warnings

Remember when we sounded the alarm that precious metals were selling below the cost of production, and to watch for supply shortages to coincide with demand surges, sending prices soaring? Gold miners are now warning that their reserves are dangerously low and they are not able to restock them due to current demand.

There are strong predictions that gold will easily reach $1500 by the end of this year and silver has even more upside potential. Even Goldman Sachs rates gold at “outperform” for the first time in 5 years.

What’s to come? No one is quite sure. But if you’re looking for a safe haven in this storm, look no further. Precious metals are still in buying opportunity range – though not for long – and can help you sleep better at night.

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