By Samer Hasn
Gold’s rebound may be attributed to investors repositioning after the shock to the US stock market last week as a result of the ignition of the trade war, which led to widespread liquidation across asset classes. While the trade war news was not new and its escalation was not unexpected, the liquidation that swept through markets last week appears to have forced gold investors to liquidate their positions to cover their other positions or to take profit after record highs.
The return of gains for the yellow metal appears to indicate a return to engagement with market fundamentals, which could boost demand for safe haven assets amid dim hopes for a de-escalation of the trade war and the resulting damage from its escalation.
The worst-case scenario is clearly becoming reality: a full-blown trade war erupts as a result of the mutual tariffs and counter-tariffs between the United States and major economies. This has reached the point where Donald Trump announced further tariffs on China, effectively bringing the total to about 125%.
This accelerating and mutual escalation is making hope for a deal and a diplomatic solution to the trade conflict increasingly dim. The Wall Street Journal Editorial Board stated in an opinion piece earlier this week that it is easy to start a trade war, but difficult to stop it once the series of retaliatory measures begins.
While Trump has stated that dozens of world leaders want to negotiate tariffs, negotiations do not appear imminent, especially with China, despite the mutual signals we have seen since his inauguration. With tariffs already at over 100%, it may be a long way before they are even cut in half – which is still a massive percentage.
One of the key pressuring channels on Trump remains from top CEOs in US, whose companies are exposed to significant risks as a result of the trade escalation. The Journal has documented the growing voices of Wall Street executives and prominent figures expressing concerns about the economic outlook and the high uncertainty surrounding trade policy. The recent turmoil has also reminded Wall Street bankers and traders of the 2008 global financial crisis, according to the New York Times. However, what may distinguish this current crisis, according to The Times, is the slim hope of a government bailout of the financial sector, as happened in the past.
Furthermore, in addition to fears of the direct economic consequences of tariffs, the US economy may remain shrouded in uncertainty, which could prevent companies from investing in the US – a key target of Trump’s tariffs – due to Trump himself, with his history of erratic decision-making, according to the Washington Post. Moreover, relocating companies’ factories from low-cost countries to the US requires significant time and capital investment, will result in higher consumer prices and reduced economic efficiency, and may not yield the desired benefits, according to The Post.
Until then, when we either see accomplishment of Trump’s vision – unrealistic to the broader spectrum of experts as I saw– of relocating manufacturing to the US and a broader economic recovery, or deals with other countries are reached, markets will remain highly uncertain regarding both the consequences of recent decisions and the nature of future ones, amid fears of economic contraction. This is what keeps gold a safe haven amidst the prevailing risk aversion.
Amidst the ongoing debate about the trade war, its consequences, and its future trajectory, the potentially explosive geopolitical tensions in the Middle East could also reverberate in markets, deepening global uncertainty and adding to the premium that fuels gold’s gains.
A direct clash between the US and Iran does not seem as unlikely as it once did. This could ignite a long-term war in the region, potentially threatening the global economy.
Iran has warned countries in the region against using its territory and airspace to target it. If this actually happens, Iran could target oil and economic interests in the region, potentially disrupting the flow of crude oil supplies and maritime navigation, contributing to further price increases.
This comes at a time when Iran has become more advanced in its nuclear program and may resort to raising the ceiling of its demands to reach a new agreement to ensure it does not withdraw from it as in the past. Therefore, achieving progress on the negotiating track will be more difficult this time, according to The Journal.
Add to this the ongoing pressure from Israel on Trump, already surrounded by hawks on Iran, to target nuclear facilities.
On the other hand, what may push both sides to refrain from direct military escalation is the current difficulties facing the US economy and its commitment to other higher-priority files, such as Taiwan and Ukraine. Furthermore, Iran will face economic collapse as the blockade tightens and if its already dilapidated energy infrastructure is targeted, bringing its exports to zero.
