Trade War, What Is It Good For? GOLD
On Tuesday, Mexico imposed $3 billion worth of new tariffs on U.S. exports.
The tariffs range from 15% to 25% on agricultural products, steel, pork, and bourbon.
You might not know this (I didn’t.), but Mexico is actually the largest market for U.S. pork, accounting for 25% of total exports. And roughly 110,000 American jobs are directly tied to U.S. pork exports.
Canada went even further.
Our neighbor to the north has introduced tariffs of up to 25% on $13 billion worth of U.S. products. As with Mexico, those products include steel and aluminum as well as food. But they also include a wide range of consumer products such as ballpoint pens, dishwasher detergent, toilet paper, and playing cards, as well as big-ticket items like sailboats, washing machines, dishwashers, and lawn mowers.
Another of our closest trading partners, the EU, has placed retaliatory tariffs on 200 American products. The United States and European Union exchange $1.2 trillion in goods and services every year.
American businesses and the market are already feeling the effects.
A new report by JP Morgan estimates this trade war has already cost the stock market $1.25 trillion in value, pushing the S&P 500 down by a net 4.5%.
“Trade tensions continue to inflict damage to investor psychology and business confidence,” the firm said in a note to clients. “A negotiation strategy that includes bluffing/threats can be successful in a two-party negotiation setup, but is more likely to deliver self-defeating results in a complex system such as global trade.”
Furthermore, the U.S. Chamber of Commerce says that 2.6 million jobs are threatened by the Trump administration's multi-front trade war.
There will also be an added cost to the American consumer. Foreign products will now cost more, as will the input costs for American companies that use them. And as higher prices abroad depress demand for American goods, U.S. companies will look to make up the difference by hiking retail prices here at home.
In other words, "inflation."
Here’s what Bob Martin, CEO of America’s biggest RV manufacturer, Thor Industries, had to say this week: “We are experiencing inflationary price increases in certain raw material and commodity based components due in large part to the headwinds created by the announcement and implementation of the steel and aluminum tariffs and other regulatory actions, as well as higher warranty costs."
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Thor's stock dropped 8.5% at the start of trading yesterday.
And this is just the beginning. Many of these tariffs don’t even go into effect until July 1. The full effects won’t be felt for months or even a year or two.
But the effects will be felt.
Higher prices, lower employment, stock market drops… These are things investors haven’t really had to worry about over the past eight years. Inflation has been muted, the stock market has enjoyed one of the longest bull runs in history, and unemployment is at its lowest level in decades.
That’s all about to change. And when it does, gold will kick off in a big way.
Here’s a metal that’s made significant gains over the past few years, rising 22% since bottoming out in 2015. And that surge came at a time of nearly-full employment, an unflinching bull market, rising interest rates, and GDP growth.
What do you think is going to happen when all or some of those factors start moving in the opposite direction? What’s the ceiling on gold prices if job losses start to mount, if consumer prices start to rise, if stocks start to falter, or if GDP stumbles?
And what’s the ceiling if all four of those things happen at once?
Contrary to what some may believe, trade wars are not good or easy to win. They’re destructive.
And we’re about to see just how destructive they can be.
So buy gold and gold miners. They’re cheap compared to the rest of this frothy market, and they’ll be among the few beneficiaries of America’s new protectionist economic policy.
Jason Simpkins is Assistant Managing Editor of the Outsider Club and Investment Director of The Wealth Warrior, a financial advisory focused on security companies and defense contractors. For more on Jason, check out his editor's page.
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