Rising Gold Prices: A Reaction To Trump's Latest Trade Actions

Omar Yusuf

5 min read

Post on May 26, 2025

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Safe Haven Demand Drives Gold Prices Higher

Uncertainty and the perception of risk are major drivers in the financial markets. Trump's trade policies, characterized by tariffs, trade wars, and unpredictable pronouncements, have significantly increased global economic uncertainty. This uncertainty fuels a flight to safety, with investors seeking refuge in assets perceived as stable and less volatile. Gold, with its long history as a safe haven asset, naturally benefits from this shift in investor sentiment.

Uncertainty and Geopolitical Risk:

• Examples of trade actions: Imposition of tariffs on steel and aluminum, trade disputes with China, withdrawal from international trade agreements.
• Resulting market volatility: Increased market fluctuations, stock market corrections, and general investor anxiety.
• Investor flight to safety: A significant increase in demand for gold as investors seek to preserve capital during times of economic and political instability. For example, the announcement of new tariffs often correlates with a spike in gold prices. Data shows that in the period following the announcement of tariffs on Chinese goods in 2018, the price of gold rose by approximately 10% within three months.

While other safe haven assets exist, such as government bonds, gold offers several advantages. Its tangible nature, lack of counterparty risk, and historical performance during times of crisis make it a preferred choice for many investors during periods of heightened geopolitical risk.

Weakening Dollar:

Gold prices and the US dollar often move inversely. Trade disputes can weaken the dollar, making gold more attractive to investors holding other currencies.

• Mechanism: A weaker dollar means that gold becomes relatively cheaper for those holding Euros, Yen, or other currencies, increasing global demand.
• Data correlation: Periods of dollar weakness, often correlated with increased trade tensions, tend to coincide with rising gold prices. For instance, the decline in the US Dollar Index (DXY) in the latter half of 2018 was accompanied by a substantial rise in the gold price.
• Other factors influencing dollar strength: While other factors affect the dollar's value, trade disputes contribute significantly to its decline by increasing uncertainty about the US economy and its global trade relationships.

Inflationary Pressures and Gold's Hedge Against Inflation

Trump's trade actions, particularly the imposition of tariffs, can contribute to inflationary pressures. Tariffs increase the cost of imported goods, leading to higher consumer prices. Gold has historically served as a hedge against inflation, meaning its value tends to increase during periods of rising prices.

Impact of Tariffs on Inflation:

• Mechanism: Inflation erodes the purchasing power of fiat currencies. Gold, being a finite resource, tends to retain its value or appreciate during inflationary periods.
• Data correlation: Historical data reveals a positive correlation between rising inflation rates and gold price increases.
• Real vs. Nominal Gold Prices: It's important to differentiate between the nominal gold price (the price in current dollars) and the real gold price (adjusted for inflation). During periods of high inflation, the nominal price of gold might rise significantly, while the real price might show more moderate gains.

Supply Chain Disruptions:

Trade wars disrupt global supply chains, creating shortages and increasing the prices of various goods. This further fuels inflationary pressures and boosts demand for gold as a store of value.

• Examples of disruptions: Tariffs and trade restrictions causing delays in shipments, increased costs for raw materials, and production bottlenecks.
• Impact on consumer goods: The increased costs of imported goods eventually translate into higher prices for consumers, impacting their purchasing power and driving them toward assets that are less affected by inflation.

Investor Sentiment and Speculative Trading

Negative news related to trade significantly impacts investor sentiment. Uncertainty and fear drive investors towards safer assets like gold, further increasing demand and pushing prices higher.

Market Psychology and Gold Investment:

• Fear and Uncertainty: During periods of heightened geopolitical uncertainty and market volatility, investors seek refuge in assets perceived as safe, driving up demand for gold.
• ETF Inflows and Outflows: Gold exchange-traded funds (ETFs) provide an easily accessible way to invest in gold. The inflows and outflows of these ETFs provide valuable insights into investor sentiment. A surge in ETF inflows signals a strong demand for gold.

Speculative Buying:

Professional traders might leverage the uncertainty surrounding trade policies to profit from gold price fluctuations. This speculative buying can further amplify price increases.

• Trading Strategies: Traders might employ various strategies such as long positions (buying gold anticipating price increases) or using options to speculate on future price movements.

Conclusion

Trump's trade actions have demonstrably contributed to rising gold prices. The surge in the price of gold is a result of increased safe-haven demand driven by heightened global uncertainty, inflationary pressures fueled by tariffs and supply chain disruptions, and shifts in investor sentiment. Understanding the connection between rising gold prices and global trade dynamics is crucial for investors. Stay informed and make strategic decisions based on the latest market developments. Consider consulting a financial advisor before making any investment decisions related to rising gold prices, or engaging in further research on effective gold investment strategies.