Just after Trump 2.0 was in office for a month, the global economic, trade and geopolitical situation has experienced a series of shocks, and gold has also set a new record high of $2,900.

What is the ultimate goal of the tariff war?

On the surface, tariffs are an effective way to solve “unequal trade” and reduce the US trade deficit of nearly $1 trillion. From a businessman’s perspective, with the US fiscal situation so severe today, tariffs are one of the ways to generate revenue (government layoffs, mineral agreements with Ukraine, and the sale of golden visas are all ways to increase revenue and reduce expenditure), and also to reserve fiscal space for the subsequent extension of the tax cut bill.

But all of the above are still only at the economic level. From the perspective of international relations, tariffs are undoubtedly a “low-cost, high-return” negotiation tool. Taking Mexico as an example, tariff policies can force Mexico to more actively manage border and illegal immigration issues, which is exactly Trump’s main promise during the campaign and a pain point for the American people. For Mexico, 80% of its exports go to the United States, and exports contribute 40% of Mexico’s GDP, which gives it no bargaining chips in tariff negotiations. It can be seen from this that for relatively weak countries, the “tariff weapon” can be said to be effective and has a demonstration effect.

But more importantly, Trump obviously recognizes the deeper problems of the United States. In 2020, the total foreign trade volume of the United States was 2 trillion US dollars, four times that of China. By 2024, China’s foreign trade volume will exceed the United States’ 5.3 trillion US dollars with a scale of 6.2 trillion US dollars, making China the largest trading partner of most countries in the world.

Changes in the foreign trade pattern between China and the United States 2000 vs 2024    Source: www.econocis.net

The different paths of the United States (focusing on politics and military) and China (focusing on economic development) have led to significant changes in the global landscape today. What is more worrying is that the United States accounts for nearly a quarter of global GDP, but only 15% of global manufacturing value added, while China’s 12% GDP share contributes about 32%. If the manufacturing industry cannot be repatriated, not only will the United States fail to make it “great again”, but it will even further weaken its own influence. Therefore, Trump urgently needs to reverse the current situation through economic (tariffs) or non-economic (geopolitical) means.

Tariffs and inflation risks

Precisely because tariffs are tools rather than the ultimate goal, delays in tariffs or partial exemptions are possible.

This week, Trump said that he would impose a 25% tariff on Mexico and Canada from April 2. At the same time, “reciprocal tariffs” will also be released in April. The European Union, Japan, South Korea, Southeast Asia, etc. may become the next target, but the market will also pay attention to whether there is room for maneuver.

Trump and his team cannot have failed to consider the risk of inflation that may be triggered by the tariff war (the deportation of illegal immigrants and domestic tax cuts may also bring inflation), because this is related to the economy, political achievements and even political legacy. But after weighing the pros and cons, some people may think that the strategic benefits that can be obtained through tariffs are higher than the short-term costs, or they may be confident that they can offset the inflation risk by “reducing costs and increasing efficiency”, but this will take time to verify.

Taking the automobile industry as an example, 40% of the cars sold in the United States in 2024 are imported, and Mexico, Japan, South Korea, and Canada account for the top four import shares. In terms of car companies, American car companies such as General Motors and Ford are the main forces in Mexico’s exports to the United States, reaching 900,000 and 390,000 vehicles respectively last year. The tariff policy may not only push up the sales price of cars in the United States, but also affect domestic car companies. Even if car companies move their production lines back to the United States, the cost will still rise significantly.

The scale of car companies’ exports to the United States through Mexico in 2024 Source: Bloomberg

The same applies to Canada’s raw materials and energy products. If the United States adds an additional 10% tariff on more than $500 billion of goods imported from China, the inflationary pressure faced by the United States may be even more severe. The Federal Reserve even stated at the end of last year that it would “slow down the pace of interest rate cuts.” The latest U.S. consumer confidence index has fallen to a low point in more than a year, sounding the alarm for the economy. What worries investors more is the impact of the tariff war on the global trade system and economic prospects.

University of Michigan U.S. Consumer Confidence Index Source: Tradingeconomics

Buy gold in troubled times?

Tariff war, Ukrainian mineral agreement, repair of US-Russia relations, drastic “reforms” in the United States…

The global situation experienced turmoil in the early days of Trump 2.0, and gold became a safe-haven asset sought after by investors. Gold rose 27% in 2024, the largest annual increase since 2010. So far this year, it has risen 11%, which is better than the Nasdaq 100 index dominated by technology stocks.

Comparison of gold prices and Nasdaq 100 growth in the past year Source: Tradingview

As the dawn of a ceasefire between Russia and Ukraine is just around the corner, the tariff issue is also on and off, which will to some extent make gold lose some of its upward momentum. But in the medium and long term, gold is expected to maintain strong demand.

Data from the World Gold Council shows that global gold demand will reach 4,974 tons in 2024, a record high. Among them, global central bank gold purchases have exceeded 1,000 tons for three consecutive years and increased by 54% year-on-year in the fourth quarter, contributing more than 70% of the increase in gold demand in 2024.

Global central bank net gold purchases have exceeded 1,000 tons for three consecutive years. Source: World Gold Council

Taking into account factors such as inflation risk, the US debt crisis, US dollar credit, currency depreciation, and uncertainty in US policies, it seems that the increase in gold holdings by global central banks (especially those in emerging markets) has become a strategic need, which is expected to be beneficial to gold prices for a long time. Based on this, Goldman Sachs raised its gold price forecast for 2025 to $3,100.

Taking China as an example, the People’s Bank of China has increased its gold reserves for three consecutive months, but the current gold reserves (2,280 tons, or about $200 billion) account for only about 5% of foreign exchange reserves, far less than European and American countries. Increasing gold reserves is also an important prerequisite for the internationalization of the RMB.

However, in the short term, the rise in gold prices above $2,900 has slowed down. If it falls below the 2,880-2,900 area, it may start a correction trend.

Gold Weekly Chart Source: Tradingview