by Peter Schiff, Schiff Gold:
Trump wants tariffs.
That could be good for gold.
According to a report on Axios last week, President Trump demanded tariffs during a recent White House meeting that included new chief of staff Gen. John Kelly.
John, you haven’t been in a trade discussion before, so I want to share with you my views. For the last six months, this same group of geniuses comes in here all the time and I tell them, ‘Tariffs. I want tariffs.’ And what do they do? They bring me IP. I can’t put a tariff on IP.”
Trump reportedly went on to assert “China is laughing at us.”
Of course, Trump campaigned on a more protectionist trade policy. It’s starting to look like the president is more aggressively pursuing that goal. The administration has threatened to pull out of a trade deal with South Korea, and NAFTA negotiations appear to be going nowhere.
And of course, Trump wants tariffs.
All of this could prove to be another boost for the price of gold.
The yellow metal is already moving higher on a weakening dollar. Peter Schiff discussed the falling dollar during a recent interview on RT’s Boom and Bust, noting that August was another down month for the greenback. After a post-election surge, the dollar has dropped six months in a row. It’s currently on pace for its worst year since 1985.
As analysis at Seeking Alpha reveals, high tariffs could serve to weaken the dollar even further.
Why are tariffs and other trade barriers bullish for gold? First, tariffs if implemented will weaken the dollar, as trade barriers restrict the amount of goods that can be traded for dollars, lowering the dollar’s purchasing power. A weaker dollar is bullish for gold. In simple mathematical terms as well we can see why tariffs will weaken the dollar. Tariffs are designed to narrow trade deficits. Trade deficits are paid for by exporting dollars. The more dollars exported, the fewer dollars remain within American borders, the fewer dollars available to bid up prices within the US. The net export of dollars then helps keep dollar prices low within the US. Cutting down those dollar exports by introducing trade barriers increases the supply of dollars within US borders and will push up consumer prices from the dollar supply side. Tariffs would also push consumer prices higher from a goods supply side. Fewer imports means fewer goods in the country, which pushes up prices as well. Even though this cannot be considered ‘price inflation,’ as higher-cost goods is not a monetary phenomenon, these higher costs will nonetheless be factored into the government price inflation statistics, making inflation look higher than it actually is and adding more fuel to the precious metals fire.”
Then there is the potential for a trade war. When governments start slapping tariffs on things, other countries inevitably retaliate. That hurts US manufacturers. And there are other means of retaliation. The Chinese could start dumping US Treasuries. China has already been selling US debt to help prop up the yuan. A further increase in the sale of of US Treasuries would place upward pressure on interest rates. In all likelihood, the Fed would have to create more dollars to balance out the move and keep rates steady. That means inflation.
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