President Trump’s recent announcement of a 100% punitive tariff on Chinese imports has once again unsettled the markets. However, on closer inspection, there are several reasons to believe that a compromise will be reached. While trade relations between the US and China are likely to remain tense, escalation ultimately helps no one.
President Trump has previously started negotiations with ambitious proposals and later highlighted compromises as successful agreements. In the trade dispute, however, China holds an important point of leverage: The country's effective control over the export of rare earths. These metals are crucial for numerous high-tech and future industries in the US. If Washington were to take drastic measures, Beijing could retaliate with countermeasures that would severely impact key American industries. China has already demonstrated that it can use its power strategically and decisively.
Furthermore, additional tariffs on Chinese consumer goods could hit US retailers hard ahead of major holidays like Thanksgiving and Christmas. Possible effects include supply chain disruptions and price increases, which could affect Americans’ purchasing power and consumption habits. Such effects could also impact overall sentiment, especially since the US labor market and consumption are already under pressure.
Our conclusion? While the current bouts of volatility are unpleasant for investors, they may also present opportunities. During Trump’s second term, such market setbacks have always proven to be buying opportunities. Overall, it seems more likely that the situation will stabilize after a brief period of uncertainty, but investors should act selectively given China’s control over rare earths.
And while two parties quarrel, a third benefits—namely, gold. In addition to economic and geopolitical uncertainties, the strong rise in the gold price also reflects growing investor concerns about the stability of current fiscal and monetary policies. Economies such as the US, UK, France, and Japan all have high debt levels and deficits; demographic challenges are increasingly coming into focus for investors; inflation is not fully under control; and austerity measures are very unlikely to materialize for political reasons.
As long as policymakers in these countries are not prepared to seriously address these challenges, gold prices can continue to rise. Of course, setbacks are possible here as well, but they are likely to be limited and short-lived. Gold therefore remains a sensible addition to equity portfolios, in our view. For investors with a higher risk tolerance, we believe gold mining stocks are also attractive, as operators benefit from high commodity prices and relatively low costs due to low energy prices.
