London — Gold has made modest ground through Asia, adding $8 on the day, but the news flow certainly suggests we could soon see increasing buying flows, as investors start to seek out portfolio protection from the incoming tariff hostilities.
Tariffs are well known to markets and the idea that Trump will come in on 20 January and put through orders to hit various economies with tariffs is firmly discounted.
What is not priced is aspect of the counter response and the potential retaliation measures…. Of course, It’s not as if anyone expects those nations targeted by Trump’s tariffs to simply take it without a counter response, but it depends on what that response looks like and whether it leads to a painful and protracted tit for tat ‘battle’ that plays out on socials and the media headlines.
Today, amid Justin Trudeau’s resignation, speculation in the Canadian press suggested the Canadians could preannounce a list of US goods that will face retaliatory tariffs in the case of Trump hitting them with 25% tax on all Canadian products. Publishing this list before Trump takes office would be seen as a step in aggression and would not be taken well by wither Trump and Jamieson Greer.
In China/HK, the US Defence department has added Tencent to its list of Chinese military companies operating in the US. Not a tariff as such, but this geopolitical development would be a big surprise, not just to the company (shares are -7.4%), but would be seen as an act in bad faith by the Chinese government. China themselves would be preparing for the worst when it comes to tariffs – they have not adhered to any of promises made in the prior agreements to buy certain US goods in a gesture to reduce the US trade deficit. Trump will use that as in his negotiations, and if there is one economy that is unlikely to get much of a cushion in the upcoming trade talks, its China.
How will China respond? Depreciate the RMB, look at trade ties with other nations (we’re certainly seeing that with China-Mexico forging ties) or come back with counter tariffs on US imports.
The Washington Post reported yesterday that Trump’s aides were exploring universal tariffs only on critical imports and not on all goods – a fact that that was quickly shut down by Trump. If the WaPo are credible, and many suspect this will be the case, it ultimately this could be a positive for risk in the long run. However, in the near-term, if the Canadian news comes to fruition, I think it opens the idea that we should prepare now for tit for tat retaliation, and its here where investors may start to look at gold as a hedge against this impending hawkish news flow.
But while it depends how hard ball each party wants to appear, it could create a new level of noise and uncertainty that could see higher market volatility and push gold back towards $2800.
*Chris Weston Head of Research at Pepperstone
