2 years ago, I went on a family trip to…
2 years ago, I went on a family trip to Universal Studios in Orlando, Florida. Sure, we went on some rollercoasters and bought some fridge magnets, but nothing compares to the ride we’ve been on in the past week.
We had the US bombing of Iran, Iran returning fire with symbolic but ineffective missiles, a peace agreement between Israel and Iran, oil and gold prices dipping, US stock markets rallying and reaching 52 week highs(!!) and now Trump shifts back focus to trade talks. They went swimmingly (sarcasm) as he announces that he is “hereby terminating ALL discussions on Trade with Canada, effective immediately”. US trade talks with the EU and Japan have also stalled as they double down on car and rice exports respectively. Perhaps the biggest mistake US trading partners are making is that they think they are engaging in trade negotiations, when Trump thinks that he is negotiating their terms of surrender.
With the focus back on tariffs and trade, I can’t help but think about that scene in the Godfather where Al Pacino says “Just when I thought I was out, they pull me back in”.
With the geopolitical risk SEEMINGLY in the rear-view mirror, markets are pricing in optimism now. Nvidia shares hit record highs over renewed AI optimism and tariff uncertainty hasn’t yet filtered into earnings or economic data.
The resurgence in public markets has breathed new life into Trump as he gets his “mojo” back (now that I think about it, there is something Austin Powers like about Trump. Maybe it’s the way they both speak). He’s become more like himself now. He’s back to being a volatile social media poster and attacking the Federal Reserve bank some more. Trump said on Friday that he would only pick a Federal Reserve chair who will cut interest rates. Sheesh.
“Stupid”, “numbskull”, “idiot”.
No, not things I’ve shouted on the M25 but rather they are the president’s words for the Federal Reserve chair Jerome Powell (who was actually ironically picked by Trump in his first term).
Why should I care about attacks on the Federal Reserve bank?
Gold’s performance has correlations with interest rates. For example, the textbook relationship between gold and interest rates is that when rates are low, gold is up and vice versa. This is because savers witness the value of their money being eroded by inflation with interest rates only sitting at 1-2 per cent. Savers then tend to invest in gold to earn a return higher than the rate of interest to protect the value of their money.
Central banks have an independent duty to meet inflation targets. If Trump elects a chairman who will cut rates willy-nilly, then this pushes up inflation. This will make things more expensive, erode purchasing power, and devalue the currency. With this bill, expected to add $3.3tn over the next decade, it will eat into the US budget and the tax cuts will help the rich today but “rob the poor tomorrow”. Will this be the straw that breaks the US deficits back?
If so, then these are the conditions in which gold flourishes.
Nonetheless, there is tariff uncertainty with an expectation that prices will be higher if a trade war starts. The Fed, therefore, with their duty to meet the 2 per cent inflation target, cannot just cut interest rates. Trump only has himself to blame for the reluctance to lower borrowing costs. He has not laid the stable groundwork for rate setters to accurately ascertain the future price levels.
Perhaps, like the ending of the Godfather series, Trump will realise that his own actions were his downfall.
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