As predicted in this column a few weeks ago, gold has now begun the slow slide that was always inevitable in a rising interest rate environment. On 28 June the price hit a six month low of US$1,249 per ounce, with further selling pressure likely.
After all, with the yield on the US dollar rising, the economic rationale for holding gold is diminishing by the day.
But, as is often the case with the barbarous relic, things aren’t quite that simple.
In the first place, buyers of gold aren’t necessarily motivated by any kind of economic rationale. More often, indeed, it’s the opposite, naked fear. When fear trumps reason, investors buy gold.
And while rate rises might mitigate economic fears, there are other kinds of fear: political, military, social, cultural.
More pertinent to any attempt at rational analysis, are the risks the Trump administration has built in to this Obama-stimulated recovery.
Strong growth has allowed Mr Trump to be bold with tariffs, and from his point of view to provide further stimulus to certain underperforming areas of the US economy during a time of wider economic growth.
What isn’t clear though, is just what the costs of those tariffs will be. Two areas are of immediate concern: jobs and inflation.
With tariffs in place, it will be economic for some companies to keep jobs in the US where they might otherwise have been exported. But for those looking to sell outside of the US, like Harley Davidson, the opposite is true. Hit by a tit-for-tat European tariff that will increase the cost of their motorcycles by more than US$1,600 apiece, the company has taken the perfectly rational decision to take some of its manufacturing abroad.
The result: it avoids tariffs, jobs are created in Europe and lost in America. It’s a simple and obvious progression, and if it’s repeated too many times across the US economy may begin to have implications for wider growth.
That in turn will have implications for the Federal Open Markets Committee and its stated aim of increasing US interest rates two more times this year. The likelihood at this point is that the rises will still happen, but a if a full blown trade war blows up and starts to magnify the Harley Davidson effect, then policymakers will be forced into a rethink.
Inflation, by contrast, has been broadly under control in the western world for many years now, and is unlikely to run away in a general sense just because the prices of certain commodities in the US are artificially supported by tariffs.
Nonetheless, in the specific industries which the tariffs support, such as steel the higher costs that ensure the security of US jobs will end up being passed onto customers. It’s not yet clear how willing they will be to pay inflated prices for US goods, or what this will do to Mr Trump’s popularity in blue-collar areas.
To be sure, the effects on the way manufactured goods are priced in the US will become clear only over time, but in the end localised inflation will be sure to distort the US economy still further. For Republicans and died-in-the-wool right-wingers it must seem strange that a President of their own ilk isn’t allowing the free market to have its say.
Tariffs are not the same as subsidies, but in terms of competitiveness there is an equivalence. Mr Trump will argue that the tariffs that he has imposed are simply a response to the long-standing practices adopted by the US’s trade partners.
Whether he’s right or wrong in that, that’s not how the rest of the world sees it. As far as the world’s other major economies are concerned, Mr Trump has started this trade war, and they are absolved of blame. In particular, the Europeans are quite content to step up to the plate and fight back, and even to escalate.
In this environment, the economic rationale for the weakening of the gold price begins to assume a smaller significance. It would only take a slight ratcheting up of the rhetoric for the fear factor to overcome all the recent incremental declines in the gold price. If it doesn’t come, gold will continue to slide. But if it does, those who have bought on the dips will be sitting on significant gains.