While gold prices are collapsing toward levels below $1200 per troy ounce, the trade war between the United States and – effectively – the rest of the world is becoming increasingly difficult to ignore. If you have been following my previous articles, then you might know that I have been warning about the consequences of a trade war (even way before Trump officially announced his first round of import tariffs) for many months. Now, finally, the first cracks are surfacing in the global economy.
Since recently, Bloomberg has begun to scrape all annual and quarterly reports by publicly-listed companies to see which companies are reporting an impact of the recently imposed import tariffs on their bottom line (you can find the tariff tracker on Bloomberg´s website: https://www.bloomberg.com/graphics/tariff-tracker/). The aim of Bloomberg´s tariff tracker is to put the sometimes somewhat “abstract” trade war in more concrete terms.
“To get a sense of how the waves of new duties on imports are rippling through the economy, we’re compiling the experiences and forecasts of companies around the world with the second-quarter earnings season underway. Tariffs are having an impact on businesses big and small, but to keep it simple we’re focusing here on a representative group of large, widely recognizable companies”, writes Bloomberg.“The way tariffs affect companies can be counterintuitive. President Donald Trump wants to protect American jobs, but General Motors says his import tariffs on car components could result in job losses in the US”, as Bloomberg correctly pinpoints the argument we have been making for quite a while.
Now, there are only a handful of companies that have released their second quarter financial results. But the list of companies affected by Trump´s trade war is starting to grow. While two companies have reported a positive impact of the recently imposed import tariffs, the impact on businesses has been – surprise, surprise – overwhelmingly negative:
- Procter & Gamble reported a “meaningful” impact on several products in Canada, which represents roughly 3% of P&G’s total global sales;
- General Motors declared that it will be forced to cut US manufacturing jobs as soon as import tariffs apply to imported cars and car parts;
- The owner of Volvo warned that its cars will cost more when the trade war escalates;
- Osram said that the recent trade war will lead to weaker sales of car lightning;
- Brown-Forman has already taken action in light of the recent import tariffs; Brown-Forman already raised prices of Jack Daniel’s whisky in Europe;
- Harley-Davidson will, as we have seen earlier, move part of its production to outside the US and estimates that European import tariffs will lead to an additional annual cost of roughly $100 million;
- Daimler is lowering its profit guidance because of the trade war between the US and China;
- Tyson Foods remarked that it is affected by every-day uncertainty with regard to providing its products and services;
- MillerCoors argues that its profits could fall by $40 million, depending on how much aluminum prices will rise.
In short, definitely not a small list for now, and a list that will only continue to grow as more companies will announce and release their quarterly results. It is certainly useful to review the Bloomberg’s tariff tracker every once and a while over the coming weeks.And this is only a foretaste of what else lies ahead: remember that Trump is on the verge of imposing many more (astonishingly impactful) import tariffs on, for example, Chinese products.
Down the road, it will become increasingly clear that a global trade war is a net positive for gold as an investment. But for the moment, the impact on economic growth, employment and inflation remains subdued and largely hidden from plain sight. A further escalation and some patience will be required to be able to observe a definite reversal in these more macro headline figures. Better yet, the fact that inflation in the US already equals approximately 2.5 percent without any impact of Trump’s import tariffs makes me fear for the worst. With a global trade war, centered around Trump and the US, inflation could easily reach, to many millennials at least, unprecedented and never-observed levels.
Of course, in the 1930s (when we witnessed the last large global trade war), a run on gold was a clear consequence. However, the dollar was linked to gold (hence, the gold price would not rise, but the Fed would be fearful of not having enough gold on hand to be able to meet dollar redemptions into gold). When the gold standard was on the brink of breaking down, president Roosevelt decided to first (in 1932) prohibit the private ownership of gold. In 1933, Americans were forced, by law, to sell their gold at a fixed price to the government. In 1934, the US dollar was devalued, and a troy ounce of gold suddenly sold at 35 dollars, instead of the earlier 20 dollars.
Nonetheless, if you would have been able to keep a large part of your savings in gold (which was perfectly possible in Europe), you would have been among the few lucky ones to safeguard your capital: a price increase from $20/oz to $35/oz is a 75% return on investment. Not a bad return given the fact that the global economy was on the verge of completely breaking down.In present times, you can simply invest in gold and protect yourself against a possible trade war. The consequences will be even more terrifying in the 21st century, because we are living in an increasingly globalized and interconnected world (much more than at the beginning of the 20th century), in which many supply chains are interwoven and cross national borders.