The golden ticket Trump has sent Australia’s way

The ill-timed trade surplus Australia recorded with the US in January isn’t unique. A record US trade deficit that same month was driven by a surge of imports, with the common theme between the Australian and US experiences being record volumes of gold.

The novel surplus Australia had with the US – for the best part of 40 years, we’ve run trade deficits with America – was largely due to record shipments of gold – $US2.9 billion ($4.6 billion) of the precious metal in a month. That’s more than double the exports of gold to the US over the entire 2024 calendar year.

Trump appears to be revelling in creating uncertainty. Credit: Bloomberg

The US trade deficit of $US131.4 billion was driven by the record $US329.5 billion of imports – $US36 billion more than in December – that included $US30.8 billion of gold and other precious metals. The average monthly imports of gold to the US in recent years has been about $US1.7 billion, so the January volumes were eyebrow-raising.

While it wasn’t helpful, while the federal government was arguing, unsuccessfully as it has transpired, for an exemption from Donald Trump’s tariffs on aluminium and steel, the Australian experience of a surge in exports of gold to the US is, therefore, part of a larger phenomenon.

As with other distortions to financial markets that have been developing this year, the explanation for the unusual activity in the gold market lies with Trump’s tariffs and the fear and uncertainty they have been generating.

The gold price has risen more than 10 per cent since the start of this year to trade at record levels.

The massive surge in US gold imports that has helped lift the price is due to the fear of traders and the industrial users of gold in the US getting ahead of any tariff that Trump might impose on the metal. Trump hasn’t, so far, included gold in his musing on tariffs, but he has referred to the potential for a tariff on copper and, obviously, has slapped tariffs on aluminium and steel.

Gold has historically been a hedge against inflation and US dollar weakness (because gold is priced in US dollars a weaker dollar makes it cheaper to acquire) and therefore it represents something of a safe haven in the volatile environment Trump has created.

His tariffs will add to US inflation, subtract from economic growth and weaken the US dollar, all of which favours higher gold prices.

There’s also been an arbitrage opportunity for the traders to exploit by shifting physical tonnes of gold to the US from their vaults in London and elsewhere.

The gold price is surging as uncertainty reigns. Credit: Getty

Bullion is usually stored in London, at the Bank of England, or in private vaults because storage costs are low, and the London gold market is deep and liquid.

In the scramble to shift their gold stocks from London to the Commodity Exchange (COMEX) in New York, traders pushed prices higher in the New York futures market than gold was trading in the spot market in London.

While the premium has since subsided to less than $US10 an ounce, at one point earlier this year, it blew out to $US60 an ounce, creating a very profitable trade.

A similar phenomenon has occurred in copper after Trump said he might impose tariffs on that metal, with the trans-Atlantic price gap blowing out to $US1000 a tonne at its peak as traders shipped copper from London warehouses to the US.

There has also been an increase in US domestic steel and aluminium prices relative to prices elsewhere, as domestic producers have lifted their prices (and profitability) to take advantage of the shelter provided by the tariffs.

Traders normally try to avoid moving physical gold because of the cost and because, where gold in the UK is held in 400 oz bars, COMEX only accepts 1-kilogram bars. That means the gold has to be recast, generally in Switzerland, one of the world’s key refining and transit centres for the metal, adding to the transit costs.

Such was the scramble to get the gold to New York ahead of any tariffs; however, there were weeks-long queues to withdraw gold from the Bank of England.

Trump’s tariffs have unsettled traditional allies and foes alike. They have raised the prospect of a tit-for-tat global trade war as those targeted by Trump for either specific tariffs or the “reciprocal” tariffs (tariffs that match other economies’ tariffs and non-tariff trade barriers) retaliate.

They are generating massive levels of uncertainty and have cast a dark cloud over the outlook for global growth, which is the kind of environment within which gold prospers.

Trump is keeping markets on their toes. Credit: Bloomberg

The gold price has also been aided by the response of governments and their central banks to the increasing weaponisation of the US dollar’s dominance of international finance and trade, most notably when it was deployed to enable the seizure of Russia’s foreign exchange reserves held offshore.

Since the Russian invasion of Ukraine, central banks have lifted their holdings of gold significantly and the US dollar’s share of their reserves has been sliding.

China’s holdings of US Treasuries, for instance, have tumbled from about $US1.2 trillion at their peak to less than $US760 billion even as it has built its gold reserves, which were 44 tonnes higher at the end of last year than at the end of 2023.

Of course, it isn’t just the gold price being affected by Trump’s tariffs.

As with other distortions to financial markets that have been developing this year, the explanation for the unusual activity in the gold market lies with Trump’s tariffs and the fear and uncertainty they have been generating.

While its export growth has cooled this year, China recorded a record trade surplus last year, with a surge in exports towards the end of the year as US importers scrambled to get in ahead of Trump’s tariffs. US companies across the economy are building excess stocks of goods and commodities as a buffer against the increased costs the tariffs will bring.

There are a lot of things the US doesn’t produce, and it would take time before it could build the factories or mines to produce them. Trump’s tariffs are going to produce a major supply-side shock – and a spike in inflation – to the US economy.

Whether or not that leads to a US recession, the prospect of which has spooked financial markets, the ominous outlook for the economy that Trump’s trade policies are creating is generating a rush towards safe havens.

Traditionally, the US Treasuries market has been the world’s safe haven, and it is notable that the benchmark 10-year bond yield has dropped about half a percentage point this year as Trump has rolled out his tariff plans.

Gold is another asset regarded, historically, as a safe repository, and it hasn’t dulled its allure in such uncertain times that, as US bond yields have dropped, so has the opportunity cost of investing in gold, an asset that generates no income.

Trump’s ill trade winds are, at least, blowing some investors some good.

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