A weak dollar won’t make America great again, but it will likely make gold a great investment for 2018. If Donald Trump does start a global trade and currency war, the price of gold will skyrocket.
It may seem counterintuitive but Donald Trump’s “America First” policy is a big problem for the future of the US Dollar and a boon for gold investors everywhere. In times of global trade wars and heightened geopolitical risks, gold becomes attractive as a currency hedge and an insurance against global financial instability. Actions speak louder than word and despite Donald Trump’s assurances that he wants a strong dollar, the markets believe that the US President and his economic advisers want to implement a weak dollar policy in order to make the US more competitive against China and the EU.
Judging by the actions taken by the White House, the so-called “America First” doctrine requires a weaker dollar. In order to bring back the jobs lost during the Obama and Bush administrations and in order to revive the American industry, Trump has to create economic and administrative barriers for imports and carve out a bigger share of the global market for American corporations.
In this context, slapping punitive tariffs on South Korean washing machines and Chinese solar panels is akin to using a teapot to extinguish a forest fire. No amount of anti-dumping investigations or WTO complaints against China can solve the underlying issue: offshoring jobs and production facilities makes economic sense as long as the currencies of countries like China, Mexico, India or Japan are relatively cheap in relation to the US Dollar. Igniting a full-scale trade war has a considerable drawback for the US because protectionist measures, implemented by the White House, will inevitably provoke retaliation from other countries.
The victims of the Trump protectionist measures will be tempted to restrict or even ban American imports, hurting the profitability of American companies and killing thousands of high-paying jobs in the US. So, Trump needs an economic “trump card”. An obvious solution is weakening the US Dollar against the currencies of America’s competitors, making their exports prohibitively expensive and at the same time making American exports great again. That is why, Treasury Secretary Steven Mnuchin told reporters in Davos that
“obviously a weaker dollar is good for us as it relates to trade and opportunities,” adding that currency’s short-term value is
“not a concern of ours at all.”
Basically, in order to make America great again and win his global trade war, Trump has to win his “currency war” first. It won’t be an easy task.
The US faced a similar problem under Ronald Reagan in the 80’s. Conservatives like to compare Donald Trump to Reagan, so it natural for the current President of the US to take a page from the playbook of the most successful Republican president. One the reasons for the “Reaganomics” success was the Plaza Accord, an agreement between the governments of France, West Germany, Japan, the United States, and the United Kingdom, who in 1985 agreed to increase the exchange rate of the French Franc, the Japanese Yen, the German Mark and the British Pound against the US Dollar. The move revitalized the US exports and gutted the industries of its allies, making their exports much less competitive and hurting their economies.
Reagan had the clout necessary to force the US allies to sacrifice their economies for the sake of American prosperity. Trump has no such influence over the leaders of the European Union, with both Macron and Merkel trying to establish themselves as the “new leaders of the free world,” citing Trump’s reckless and dangerous behavior. It is a safe bet that Xi Jinping will not sign a new Plaza accord and will refuse to sacrifice his “Chinese Dream” strategy in order to appease Donald Trump, who is widely seen as a Sinophobe in China. The only solution left for the Trump administration is to unilaterally devalue the US Dollar and try to prevent other countries from engaging in competitive devaluation.
If history is any indication, this strategy will inevitably lead to higher prices for all hard commodities like oil or aluminum and precious metals, like gold, silver and platinum. Gold is the perfect hedge against Dollar devaluation and that is why Steven Mnuchin’s endorsement of the weak dollar policy immediately triggered a small spike in gold prices. Donald Trump tried to repair the damage, claiming that Mnuchin’s statement was misrepresented, but the gold market so far remains unconvinced.
Ironically, Trump’s weak dollar policy plays right into the hands of Vladimir Putin and the Central Bank of Russia. It is widely known that the Russian Central Bank is on a gold-buying spree. The latest figures show that Russia added 300,000 ounces (9.3 tons) of gold to its reserves in December, bringing the total holdings to a record-breaking 59 million ounces. According to Russia Today’s calculations, since 2015 the Russian Central Bank has added over 558 tons of gold to its vaults. The US gold reserves that are never properly audited or even shown to journalists or members of the Congress, triggering speculation that the US gold reserves are gone. The only recent “proof” of the US gold reserves existence is a photo of Steven Mnuchin holding a single gold bar. In contrast, Russian journalists were recently allowed to roam unhindered in one of the Russian Central Banks secret gold vaults, so the Russian media is awash with photos showing thousands of gold bars.
The Russian gold reserve, accumulated during Vladimir Putin’s terms in office, is definitely real and it will experience a parabolic increase in value, if the US decides to radically devalue its currency.
Donald Trump says that he “ultimately” wants a strong dollar. However, currency debasement is usually a one-way street, therefore the future Trump is speaking of may never come. It is also well known that there is nothing more permanent than a temporary solution. The temporary weak dollar policy may be not so temporary after all and in this case, the best advice that can be given to anyone interested in surviving the global currency wars is to buy gold.