by Craig Hemke, Sprott Money:
The long-awaited announcement of President Trump’s tariff plans last week sent the world’s markets tumbling, with gold and silver prices nonresistant to the move. What happens next is impossible to state with certainty, but we’ll give it a try anyway.
Buy Gold As Economic Fears Escalate
As last week began, everything looked great for gold and silver. In fact, in response to the initial tariff headlines, gold and silver prices saw their highest levels of the new year with COMEX gold tapping $3200 and COMEX silver reaching $35. It’s what happened next that ruined everything. The markets soon discovered that Trump’s tariffs were far more severe than expected…and down we went, along with just about every other “risk asset” on the planet.
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Gold Price – 15 Minutes Candlestick Chart
Silver Price – 15 Minutes Candlestick Chart
Fed Policy And Gold Price Outlook
What happens next is unpredictable, and things may get worse before they get better. However, I’m quite certain that, over time, these tariff announcements will lead to higher precious metal prices, particularly for gold. Why?
Because if the tariffs proceed fully and as planned, they will no doubt worsen what was already a weakening U.S. economy. As the economy falters, so will the stock market, leaving banks and consumers in a precarious situation. What will be the response from the Federal Reserve? You guessed it! A fall back to the same old playbook:
- Fed funds rate cuts.
- Opening the discount window for immediate liquidity.
- End of Quantitative Tightening and resumption of Quantitative Easing.
- Emergency bank lending programs.
- Backstopping of massive over-leveraged hedge funds.
Stagflation Risk And Precious Metals
But this time might be different, you say? Hmmm. Not quite. In the end, the Fed will act in the best interest of themselves and their member/owner Banks. That much is certain. Additionally, any economic pullback will reduce government tax revenue, leaving the total U.S. deficit to grow even faster than any D.O.G.E. cuts can trim.
And Trump may have opened a real can of worms here. In theory, academics can claim that reciprocal tariffs will “level the playing field”, “bring home jobs”, and “increase government revenue”. In practice, however, many hundreds of variables make the outcome of Trump’s policies utterly unpredictable. The Smoot-Hawley tariffs of 1930 may not have been the entire cause of The Great Depression, but most historians agree that they certainly seemed to make matters worse in the years that followed.
We may not be talking about Great Depression II here, but there’s a real possibility that Trump’s tariffs are about to set off a troubling bout of stagflation—an economic condition defined by low/negative economic growth with surging/high inflation. The last such period in the U.S. was seen nearly fifty years ago with the stagflation of the 1970s. Do you recall how the precious metals performed under stagflationary conditions?
