Tariffs & Trade War – Déjà vu?

Gold and Silver experienced some erratic moves on Wednesday, especially between futures and physical spot prices. The spreads were much bigger than usual. The common rationale for the difference was the pending introduction of tariffs on imported goods, including Gold and Silver. That may be true, but if tariffs increase the prices of Gold and Silver futures, shouldn’t they increase the physical prices too, keeping the spread relatively stable?

Buy Gold During Trade War Uncertainty

Back in March 2018, President Trump introduced tariffs on imported goods. Déjà vu anyone? Yet, Gold and Silver fell. China responded to the tariffs by devaluing the yuan relative to the dollar. Said differently, the dollar soared relative to the yuan. This ensured that the dollar price of Chinese exports to the US remained the same in spite of the tariffs.

At the same time, the Chinese pegged the Gold price to 8100-8700 in yuan terms. With Gold fixed against the yuan and the yuan being devalued against the dollar, the price of Gold in dollar terms fell from a peak of 1365 in April to 1160 in August. A drop of 15% in 4 months.

For example:
Gold at 8100 yuan divided by USDCNY 7.00 = ~$1160 Gold

Gold Spot

The Yuan’s Role in Determining Gold Prices

Fast forward to today and the prospect of tariffs drives the prices of Gold and Silver higher? Perhaps.
USD/CNY is 7.28, basically the same as it was in Aug 2024, at ~7.00. This confirms that the rise in Gold in dollar terms was primarily driven by the massive increase of Gold in yuan terms—from ~8100 to ~19000 yuan.

Real-Time Currencies 

But what if the Chinese devalue the USD/CNY to 10, for example, to keep the price of Chinese exports in dollar terms the same, and keep Gold fixed this time around too, at ~19000-20000? This would drop Gold to ~2000 in dollar terms (20000/10 = 2000).

Should You Buy Silver as a Hedge?

The explanation that tariffs are driving “UP” Gold and Silver prices is questionable.
China’s economy is slowing, and its growth is heavily dependent on its exports.
China can and has devalued its currency to offset the impact of Trump’s tariffs on Chinese exports.
It appears that China has control over the Gold price via the USD/CNY exchange rate. A weaker yuan would “reduce” the price of Gold in dollar terms.

China has been loading up on Gold for years now and continues to add to their vaults. They prefer to buy at lower dollar prices and get rid of their dollars at the same time.

The Historical Pattern: Trade Wars and Precious Metals

Back in 2018, the various indicators were rendered useless, due to China’s stranglehold on the price of Gold in yuan and dollar terms. The same could happen today.
If history repeats, or at least rhymes, we could have another trade war, sending Gold and Silver lower in the short term, before going even higher thereafter.

Start Investing in Gold and Silver Today

Buy Gold and Buy Silver in Canada, historically proven hedges during economic uncertainty. Don’t miss the opportunity to secure your financial future.