Trade wars happen from time again. They start innocently with one country trying to protect its industries and make their nation great. So, a country imposes tariffs to level the playing field a little, but before anyone knows it the other country retaliates and imposes its own tariffs and then everyone gets engaged in a tit-for-tat war.
How is gold affected by trade wars? Trade wars should ideally be positive for the pros of gold. This is because they slow down economic growth and gold performs best during economic turmoil and recessions. Trade wars reduce investor’s appetite for risk thereby supporting safe-haven commodities like gold. So when Australia and China began their trade war, it affected the gold price Australia.
Australia’s relationship with China has had its ups and down however, things took a turn in 2011 when the then American president, Barack Obama took decisive measures against China for its actions in the Asian Pacific. Australia also became more vocal about the Chinese aggressive policies regarding the South China Sea and its alleged meddling in Australian politics. In 2017, following the scandal of an Australian senator’s shady donation dealings with a certain wealthy Chinese businessman, Australia passed legislation on foreign interference which a lot of people saw as Australia’s counter to the Chinese growing influence in the country’s politics and economy. Still, China remained Australia’s best trading partner.
Tensions rose when the Australian government blocked several Chinese investments into Australia because of “national security” reasons. Things came to a head when Australia called for an investigation on COVID-19 and how much the Chinese government knew or what they did. This move pushed things over the edge. Even as China blocked certain investments, critical companies dealing with energy were approved. It seemed like Australia was giving too many mixed messages which would have been confusing for a lot of people. What Australia was doing was standing up to a powerful country with a one-party state that has believed it had the monopoly on truth.
What this will do to Australia’s economy
Australia might be one of the countries which have a trade surplus with China. This makes it vulnerable to a trade war with China which has less to lose. The stakes are low for China because the things that Australia exports to China are things they can easily buy elsewhere, except for commodities like iron ore or liquefied natural gas.
China is also the biggest consumer of gold in the world and if it remains embroiled in trade wars with other governments like the US, the European Union, and Australia, the gold price Australia will also be affected. Experts have warned that further tensions could compromise the country’s economic recovery post-COVID-19. A serious trade war between these two countries can end up costing Australia 6 percent of its GDP.
It’s hard to tell what this latest trade war between Australia and China will bring. History doesn’t map things out clearly. There have been several trade wars since 1970 when the gold price was freed by the scrapping of the gold standard. The U.S imposed trade tariffs on Japanese cars and electronics and European Pasta in the 80’s when Ronald Reagan was president. And then in 1993, Europe imposed trade tariffs on South American Bananas. George W. Bush came along and imposed tariffs on steel and when he left Obama put more tariffs on steel, tires, and solar panels. And more recently, Donald Trump imposed tariffs on a lot of Chinese products from agricultural products and iron ore products. China retaliated with its own 25% tariff on U.S products.
How has gold reacted to trade wars in the past?
Let’s look at Trump’s war, the price of gold declined between January and October of 2018 from $1,300 an ounce to $1,200 an ounce.
What has been interesting about trade wars is that on their own have not been positive for gold. The major reason that they strengthened the American dollar, which happens to be the main competitor of the gold market. Looking at Trump’s trade war, one can conclude that trade wars are generally not good for this yellow precious metal. This could because of the pressure they put on the US greenback or because other factors are more significant. Whilst gold is largely regarded as a monetary asset, the fluctuations of the price of this precious metal is a good reflection on the global sentiment. It is mostly affected by the macroeconomic conditions in the United States of America. Simply put, if the American economy is doing well and the dollar gaining strength, the price of gold will decline whether there are trade wars or not.