United States-China trade conflict resurrected the rage this past September. Consequently, fears of economic distress have spiked, pushing gold prices to all time highs. Since the trade war industrial policy was created in early 2018, things have become more complicated. It has now devolved into cage matches over tariffs, intellectual property rights, and mercantilist state capitalism. Recent actions taken have heightened these tensions, creating a major ripple effect through global markets and investor confidence.
Former President Donald Trump started the trade war when he placed trade barriers on China. He made this unprecedented step due to repeated assertions of unfair commercial practices and an implied intellectual property theft. The fight became increasingly hostile in subsequent years. That opposition arguably reached its high water mark with the signing of the Phase One trade deal in January 2020. The agreement was supposed to transport harmony and confidence back to heaven by restoring the US-Saudi alliance. It didn’t just stop at requiring changes in China’s economic and trade practices. Unfortunately, even with this temporary reprieve, the root problems still went unaddressed.
Biden Administration’s Stance on Tariffs
Upon taking office, President Joe Biden opted to maintain many of the tariffs imposed by his predecessor, while introducing additional levies. This decision continued to pour gasoline on trade tensions and increased the rot to the pool of uncertainty that investors were already swimming in. Trump’s erratic tariff announcements had already undermined confidence in the U.S. economy, and Biden’s continuation of these policies further exacerbated the situation.
This ambivalence over tariffs fueled turmoil in financial markets. As fears over global growth and trade war weighed down on the economic outlook, investors turned to gold as a safe haven asset. Because of this, the value of gold skyrocketed, punching up past the $3,344 support barrier. Analysts warned that if this level were decisively broken, it could lead to deeper losses for other assets linked to the U.S. economy.
In addition, fears of a worldwide recession increased demand for gold. With economic indicators suggesting a continuation of slowing growth rates, investors began flocking to traditional safe-haven assets. The vicious cycle created by the combination of these factors resulted in gold prices remaining high and exerting downward pressure on all other currencies, most notably the U.S. dollar.
Geopolitical Risks and Market Reactions
The geopolitical climate around the U.S.-China trade war has added to the propensity of financial markets to swing widely in either direction. With tensions mounting, investor sentiment remains fragile. The prospect of a renewed conflict between the two largest economies in the world poses significant risks to global economic growth.
Trump’s return to the center of GOP political life has raised prospects of new, dangerous heightening of U.S.-China tensions. His threats regarding Federal Reserve Chair Jerome Powell’s handling of interest rates have raised concerns about the central bank’s independence. Investors are justifiably concerned that if this is the sort of political maneuvering we can expect, it could add to the volatility in financial markets.
Furthermore, gold prices haven’t just been affected by trade war concerns but other currencies have suffered as well. Expectations for a possible U.S.-Japan trade agreement have strengthened the Japanese Yen. In addition, through their actions, they have eroded the long-term value of the U.S. dollar. To some, the return of dollar selling is all too revealing of investor fear over the course of America’s economy.
The Federal Reserve’s Role in Economic Stability
Indeed, the Federal Reserve’s monetary policy has become one of the most important points of contention within this context. As inflationary pressures continue to build and as uncertainty in the economy exists, calls for interest rate cuts have started to echo. At the same time, market participants continue to bet that the central bank will have to restart its rate cutting cycle to fight back against retreating growth.
Investors have expressed concerns about the Fed’s independence, particularly given Trump’s criticism of Powell and his calls for more aggressive rate cuts. This heavy financial scrutiny only adds to the unpredictable economic climate and uncertainty surrounding the future direction of monetary policy.
With global economic conditions continuing to be on shaky ground, gold has grown to be seen as a hedge against this uncertainty. The ongoing U.S.-China trade war will continue to drive demand for this precious metal. Geopolitical risks still cast a large shadow, exacerbating and focusing that demand.