Strong economic growth represents the perfect backdrop for Trump to steer the US onto a new economic course
This week gold price continued its recent downward trajectory and is now closing in on the US$1,200 mark, a level not seen for more than a year. The immediate cause was testimony from Federal Reserve chairman Jerome Powell that rates are likely to continue rising.
The market, broadly speaking, wasn’t surprised. Powell has signaled rate rises already this year. But the ongoing tensions in global trade in regard to tariffs had injected a small element of doubt into the mix.
But Powell scotched that soon enough. In spite of the fears of a future trade war, as it stands the US economy is doing very well. Indeed, we’re getting to the point where the cost of borrowing ought to rise in order to prevent it from overheating, and that marks a return to a more conventional monetary policy that the US and indeed the world has been waiting for for more than ten years.
So, reasons to be cheerful then? Yes, if you own dollars. But not if you’re Mr Trump himself, who wants to see a weaker dollar to encourage exports, or if you own gold or one of the major commodity currencies.
It’s tough even if you own other metals like copper, which has come under pressure in recent weeks. Copper is often seen as a bellwether for the global economy and its recent steep decline from over US$3.00 per pound down to a current price of around US$1.79 is one of the strongest signs yet that the trade war that’s in the offing is likely to have a serious impact.
It’s not the only one, though. Chinese foreign direct investment has dramatically swung toward Europe in the first half of 2018, while corresponding investment into North America has dropped by 92%, from $24bn to $2bn, according to international law firm Baker Mackenzie.
Mr Trump’s policies are already changing global trading patterns, and the change might not be to the long-term benefit of the US.
Of course, that type of argument depends on just who you are inside the US.
It was notable in the recent round of interviews conducted by former Trump adviser and continuing cheerleader Steve Bannon that he referred to the current administration’s policies as economic nationalism. Protecting steel workers behind tariffs clearly does benefit that steelworker, and his family, and perhaps too all the service industries that go towards supporting the steel industry.
The higher costs will get passed on to the consumer though, just as surely as if they were being taxed to subsidize the steel industry directly. Free-traders find this anathema, but there’s nothing wrong with it as far as politics is concerned. Protection and subsidy are as old as economic activity itself – the Romans subsidized bread and circuses, after all.
But what protectionism doesn’t do is make for stable markets. Prices are artificially inflated, the true picture of supply and demand becomes distorted, and consumers become increasingly unsure if they are getting the best deal.
It’s not surprising that the world’s global economists rail against this. And in terms of overall global economic growth they may well have a point. But Mr Trump has an ace up his sleeve. The US economy is already doing well. Even if his policies do shave a few fractions of a percent off growth, overall performance will remain strong. It’s similar with Brexit, a policy which is causing significant damage to the UK economy but at a time of relative economic strength. The UK economy and Mr Trump ought, at the moment, to be able to absorb the shock of any negative impact of prevailing policy.
Whether either would dare to chart the courses they are on at a time of economic downturn is another question entirely. In that scenario the gold price would likely recover pretty sharpish. But as things stand, the likelihood is that gold will slip below the US$1,200 mark before the next couple of months are out.