Last March when the probability of tariffs began to look more certain, we discussed what that sometimes can mean for precious metals prices. Today, as the President announces the end to some tariffs and the beginning of others, we wanted to reflect on what has happened since writing the article mentioned above. Hopefully, we can also get a sense of what challenges lie ahead as we move forward.
Most tariffs went into place in late September 2018. At that time, Gold was around $1200/ounce. Today, with the President announcing an end to steel and aluminum tariffs, Gold sits at $1280 per ounce at the time of this writing. Meanwhile, much damage to the economy has come about, with many industries and business owners voicing their disapproval about new and ongoing tariffs being expanded. One of the primary causes for disapproval is the increased costs or inflation experienced by American manufacturers and the American consumers. When costs are rising into what many are calling a recession or slow down, in some ways it can seem to deepen the economic turmoil.
What is Going On?
It can be difficult sometimes to understand what is going on in the economy, or to know which reports to pay attention to. On the one hand, we hear that the unemployment rate is the lowest in many years. Supposedly there are record numbers of people working in our economy today, with incomes rising. Normally that would indicate that growth is happening, sales are booming, and we should all be happy to “let the good times roll”. But not all are participating equally in this recovery. People are not shopping like they used to, and the dollars in their purse or wallet aren’t buying what they used to. As a result, retail store closure announcements are already more in 2019 than in the entire year of 2018. One of the reasons given by some retailers is the increased costs they face due to tariffs.
When retailers close their doors, people lose jobs. When manufacturers decide to make fewer items, people lose even more jobs. The auto industry is reducing jobs at the fastest rate since 2009, with 207% more people losing their jobs than last year at this time. Auto manufacturers want to make fewer automobiles, because inventories have become bloated, and people are not purchasing cars and trucks at the same rate as in years past. Tariffs have also increased the costs for raw materials, at a time when it is difficult to pass those costs on to consumers. Often times a slow down in the automotive sector often precedes or comes in conjunction with recession, and a lower stock market.
How is any of this good for the United States? One of the answers we often hear, is that while tariffs may add to our economic pain, it is creating circumstances even more difficult for our trading partners. Our economy is sometimes described as “the cleanest dirty shirt in the laundry”, and better able to handle the effects of economic warfare that tariffs can bring. Some believe the pain we are feeling is a necessary part of correcting imbalances, which can help coax manufacturers to bring industry back to the United States as it becomes even more expensive to operate on foreign soil.
Stability in Troubled Times
What, if anything, can the average American do to protect themselves? One of the largest threats we face has to do with protecting our purchasing power. In other words, how can we make sure that the Dollars we have in savings today, will still purchase the goods we need in the future? When prices are stable, it is easy to do. Incidentally, prices were the most stable when our currency was backed by precious metals. As Forbes magazine so eloquently put it, “No financial crises was ever caused by stable money.” We wrote here about legislation proposed by some in Congress to bring back the gold standard to support the Dollar, and help maintain stable prices. There has been little done, however, to enact the legislation.
The good news is, our protection from the ravages of inflation is not dependent on legislation from Congress, or from the end of sanctions, tariffs, or the trade war in general. Whether or not the nation as a whole experiences the purchasing power protection of precious metals, you and I can experience it individually. Since most tariffs were imposed last September, Gold is 6.7% higher in Dollar terms. As the article above about pending legislation mentions, Gold increased by 10% per year in Dollar terms, from 2003-2018. In other words, as the cost of goods and services has grown over the last 15 years, Gold has kept pace pretty well. Dollars saved in your bank account may have only increased by 1.2% per year the last 15 years, while Dollars converted to Gold increased by 10% per year.
What About the Future of Gold?
Even though we do not know ahead of time exactly what will happen with the price of precious metals in Dollar terms, history has shown Gold to be effective protection long term. In the book “The 7.0% Solution”, it is shown that since de-linking the Dollar from Gold in 1971, Gold has increased by 7% per year average in Dollar terms. Today the average has improved to 7.52% per year, due to an increase in inflationary conditions since the book was first published in 2016. These trends seem likely to continue over time, and certainly have since the introduction of tariffs and trade war to the global economy. Silver has also benefitted from the tariffs imposed last September, but true to form, has been more volatile than Gold. Silver has been from 3-13% higher, and fluctuates more than Gold in price, on a percentage basis. During the same period, most bank accounts have paid less interest than the rate of inflation, and major stock indexes have shown no growth.
Never before have major changes in economic policy been announced by a Tweet from the President’s phone, but this is where we find ourselves today. Sometimes, even cabinet-level advisors have seemed surprised by what strategy will next be employed by this administration. While this can create a great deal of angst and uncertainty for the financial media on Wall Street, holders of precious metals find comfort in owning an asset that has proven to offer unmatched protection of purchasing power over time, regardless of conditions.