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Tariffs and Inflation, Gold and Silver

Economic News
Gold and Silver may provide shelter from the turmoil and inflation resulting from tariffs and brewing trade wars.

President Donald Trump has threatened sweeping tariffs on steel (25%) and aluminum (10%) imported into the United States. His reasoning is direct – steel is a strategic industry.

Canada/Mexico and The North American Free Trade Agreement (NAFTA)

Even though the U.S. has a trade surplus with her northern neighbor, Canada is a major exporter of steel to the United States. The proposed tariffs would impact Canada adversely. The President has made no secret that the tariffs are intended as a bargaining chip for the renegotiation of NAFTA with Canada and Mexico. Trump tweeted “Tariffs on Steel and Aluminum will only come off if new & fair NAFTA agreement is signed.”


The President also put Europe on notice that he is not pleased with the trade imbalance between the U.S. and the E.U.


To date, Trump has been conspicuously silent on his views regarding China and tariffs. China’s trade surplus with the United States is nearly $300 billion. China produces a wide range of finished consumer goods that are imported into the United States. While there is a huge trade deficit with China, the United States in recent years has been exporting increasing amounts of oil and natural gas to China. It seems for now the President is focusing first on dealing with NAFTA while putting the E.U. on notice and holding off on any action with respect to China.

U.S. trade partners have expressed alarm at Trump’s proposed tariffs and it remains to be seen, what if any, retaliatory actions trading partners might take if the Trump tariffs are imposed.

Never Trumpers, Globalists and Free Traders are Against Trump’s Tariffs

Trump’s political enemies, some of his allies and many political pundits have panned Trump’s planned tariffs. Even Speaker of the House Paul Ryan has expressed concern. “We are extremely worried about the consequences of a trade war and are urging the White House to not advance the plan,” said AshLee Strong, Paul Ryan’s spokeswoman,

Trade Wars are Easy to Win!

Despite the trepidation of U.S. trading partners and adviser warnings about following through on his tariff threats, Trump is seemingly sanguine, tweeting that “trade wars are good and easy to win“.

Inflationary Impact of the Tariffs?

Tariffs can have a significant destabilizing impact on global trade. Tariffs on steel and aluminum, however, will help U.S. steel and aluminum manufacturers, giving them the ability to compete and win more business in the United States and thereby allowing them to hire more workers and pay higher wages. This dynamic, coupled with the new Trump tax cuts, will give more workers even more money in their pockets to spend. The Trump tax plan has already resulted in increased company stock buy backs which are boosting the stock market further and adding to the “wealth effect”.

When employers have to pay higher wages, they generally boost the price of their products and services to offset the higher employment costs. When employees have more money in their pay packages due to increased wages and tax cuts, they generally spend more. A upward inflationary spiral can occur when consumers flush with cash, increase spending on goods that are rising in price.

Adding fuel to the inflation fire is the possibility that tariffs get expanded to finished goods coming from China, which would immediately result in price inflation. In addition, if the dollar falls as a result of geo-politcal tensions and/or perception that tariffs are not helping the United States, the cost of imported goods (irrespective of any existing or new tariffs) will become more expensive, further adding to price inflation.

Gold and Silver – Inflation Hedges

Gold and silver are historic hedges against geopolitical turmoil and inflation. The time to be properly hedged against inflation is before it manifests itself. The current economic mix with corporate and individual tax cuts kicking in as well as the possibility of a U.S. trade war with its North American, European and Chinese trading partners, make the threat of inflation a significant possibility.

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This article by BGASC is not, and should not be regarded as, investment advice or as a recommendation regarding any particular course of action.