Trade War Fears Spark Market Sell Off
It was another dramatic week for the markets as the Dow fell over 700 points on Thursday due to trade war fears. In fact it was the worst week for stocks in over two years. President Trump announced the likelihood of tariffs on at least $50 billion worth of Chinese imports as well as tougher restrictions on acquisitions and technology transfers. The prospect of trade war between the world’s two largest economies rocked the global markets through Friday trading as well. Furthering the trade war fears, on Friday China proposed measures to slap $3 billion of U.S. imports with tariffs. China also threatened to stop buying U.S. treasuries on Friday.
These tariff threats between China and the U.S. are reminiscent of the trade war sparked in 1930 after the passage of the Smoot Hawley Tariff Act. The U.S.’s imposition of tariffs on imports prompted key trading partners to impose counter tariffs. Ultimately, the result was higher prices and economic slowdown, which exacerbated the Great Depression.
What this means for investors: The global stocks fear predictably sent investors to gold and other safe havens. Gold started the week just over $1,312, however on Thursday it shot up over $1,330 and nearly hit $1,350 in Friday trading. Silver closed around $16.55.
Federal Reserve Announcement on Rates Was Bullish for Gold
It wasn’t only trade war fears that lifted gold this week. Gold got a boost on Wednesday as well following a Federal Reserve announcement. Chairman Jerome Powell kept to the plan for three rate hikes this year. Furthermore, the dollar weakened as the Fed raised a key short term rate by a quarter point, and gold went up. A weaker dollar generally means higher gold.
What this means for investors: One reason for gold going up is that the economy growth projections are slightly lower than what is expected. Inflation expectations are going to be key going forward as well. There is some growing worry that the recent tax cuts are leading to higher inflation without the expected economic growth. Rising rates often work against gold, but regardless, last year gold was up 13% for the year despite rising interest rates.
U.S. Debt Hit $21 Trillion This Week
Another important event this week was the $1.3 trillion omnibus spending bill signed by Trump on Friday. It is the second biggest spending bill in U.S. history, and the President signed it to the chagrin of many conservatives. The bill follows immediately in the wake of U.S. debt topping $21 trillion. One trillion of that was in the last six months. The passing of the spending bill avoided a government shut down, but is a huge step closer to an impending debt crisis.
What this means for investors: There is concern that the ramping up of spending – including higher defense and infrastructure spending – is going to happen without a solid plan to raise government revenue. This is all highly inflationary and bodes ill for the dollar. When fiat currencies devalue, gold’s intrinsic value increases significantly.
Gold Poised to Spring Out?
Trade war fears and inflation are just some of the reasons why gold looks poised to make significant gains this year. Even before gold hit a one month high this week, analysts were making the bullish case for gold. Last month the stock market had a steep correction and gold failed to rally as much as the gold bugs expected. This week the markets had a steeper correction with the combined inflation expectation and trade war fears and gold shot up. The dollar index is key to watch for gold right now. Check out what Vertical Research’s Michael Dudas sees for gold this year.
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