Gold soared to LTH after Trump’s metal tariffs; what’s next?

·       At around $2942 new life time high, Gold may have surged too much above its true potential; average fair value may be now around $2600

·       Wall Street closed almost flat Tuesday on less dovish Powell testimony, Trump tariff tantrum, Gaza war ceasefire fragility, and progress on Ukraine war ceasefire.

On Friday, Wall Street Futures, UST, Gold, and Silver stumbled, while USD, and US bond yields surged on the renewed concern of an all-out Trump trade war 2.0 as Trump may now introduce reciprocal tariffs on trading countries/partners. On Friday, Trump signaled a potential escalation in trade tensions with India by threatening to impose reciprocal tariffs. He criticized India's high tariffs on American goods, highlighting instances where India imposes tariffs as high as 100% on certain U.S. products. Trump emphasized that under his administration, the U.S. would adopt a policy of matching the tariffs imposed by other countries, stating, "If they tax us, we tax them the same amount."

Late Friday, Trump again talked about a potential imposition of a 25% tariff on all steel and aluminum imports into the US. This move is part of his administration's aggressive trade strategy aimed at protecting American industries. The tariffs are in addition to existing import duties, and Trump has indicated that reciprocal tariffs will be imposed on countries that retaliate with levies on U.S. goods. Major steel suppliers to the U.S., including Canada, Brazil, Mexico, and South Korea, are expected to be affected.

On Monday, President Trump is expected to announce the reintroduction of a 25% tariff on all steel and aluminum imports into the US, a move that has sparked concerns of escalating global trade tensions and potential retaliation from affected countries. The tariffs are scheduled to take effect on Monday itself. Trump also indicated he would announce reciprocal tariffs midweek to match the rates other countries charge on US exports.

In response, the EU has stated it will retaliate against these new tariffs. French Foreign Minister Barrot emphasized that France and its European allies must defend their interests against U.S. tariff threats. He noted that a similar situation occurred in 2018, and the EU responded then and will do so again. The European Commission will determine which sectors will be targeted in the EU's response and is prepared to act promptly.

Financial markets have shown resilience despite the announcement of new tariffs. Currencies such as the Australian dollar, Mexican peso, and Canadian dollar, as well as Australian stocks, experienced initial volatility but subsequently recovered. Analysts caution that escalating tariffs could lead to a global trade war, impacting supply chains and increasing economic volatility. While some U.S. manufacturers might benefit, others that depend on imported materials could face profit margin pressures. The uncertainty surrounding tariff policies complicates corporate decision-making.

In Australia, PM Albanese is set to lobby President Trump to exempt Australia from the newly imposed 25% tariffs on steel and aluminum. These tariffs have had significant negative economic impacts, wiping $15 billion off the Australian Securities Exchange and affecting major Australian companies involved in the U.S. steel industry. Former Prime Minister Malcolm Turnbull advised Albanese to stand firm, stressing that the U.S. operates strictly in its national interests and that Australia should leverage its strategic alliances like the AUKUS submarine deal.

The Australian government has been in urgent discussions with U.S. officials, and Trade Minister Farrell reaffirmed the importance of free and fair trade. The U.S. is a key export market for Australia, and tariffs could significantly hurt Australian industries. Australia's political and business circles are preparing for the potential implications, with calls for strong diplomatic efforts to secure exemptions similar to those achieved during Trump's first term.

These developments have raised concerns over global economic implications, including potential inflation and increased interest rates/borrowing costs. European leaders, including French President Macron, have expressed opposition and hinted at retaliatory measures. South Korea's government has already convened emergency discussions to mitigate the impact on its steel industry.

Trump trade war and India: Is it a negotiation tactic ahead of Indian PM Modi’s US/WH visit?

New Tariffs: Trump will impose a 25% tariff on all steel and aluminum imports starting Monday. He plans to introduce reciprocal tariffs later in the week to match what other countries charge on US exports.

Impact on Trade Relations: This decision has the potential to strain relationships with allies such as Canada and Mexico, who are major suppliers of steel and aluminum to the U.S.

Retaliatory Measures: The move could invite retaliation from other countries and escalate trade tensions.

India's Perspective: While India is not a major exporter of steel to the U.S., there are concerns that the tariffs could lead to the dumping of steel and aluminum in markets such as India.

Global Concerns: A similar move during Trump's previous term led to protectionist duties elsewhere, harming Indian exports. The EU also restricted imports fearing Chinese steel diversion, negatively impacting Indian exports.

Domestic Market: India's steel imports have surged, with imports from China rising significantly.

Expert Opinions: According to steel secretary Sandeep Poundrik, the tariffs should not have much impact on the Indian industry, as Trump metal tariffs 2.0 may not apply to China, which was the prime dumper in the past; also there is not much difference between landed cost of Chinese steel with domestic ones

Historical Context: During his initial term, Trump introduced tariffs on steel and aluminum imports from Canada, Mexico, and the European Union but later lifted them after reaching an agreement with Canada and Mexico[

Broader Strategy: The tariffs align with Trump's economic strategy to bolster the US economy, safeguard jobs, and increase tax revenue.

On late Monday (10th Feb’25), President Trump officially announced the imposition of a 25% tariff on all steel and aluminum imports into the US effective March 12, 2025. This move reinstates and expands upon similar tariffs from his previous term, this time without exemptions for allied nations such as Canada, Mexico, Brazil, and South Korea.

The Trump administration's stated objectives are to bolster domestic production, create jobs, and reduce reliance on imports. However, these tariffs may lead to increased costs for American consumers and potential job losses in industries dependent on imported metals. In addition to the metal tariffs, President Trump plans to implement reciprocal tariffs later this week. These tariffs aim to match the rates that other countries impose on U.S. goods, targeting nations with higher tariffs on American products. While intended to promote fairer trade practices, this strategy carries the risk of escalating global trade tensions and may lead to retaliatory measures from affected countries/trading partners.

The global response has been mixed. Countries like Germany and members of the European Union have expressed concerns and warned of possible retaliatory actions ‘within an hour’! The UK’s steel industry has voiced fears of a "devastating blow" due to the potential impact on exports. Domestically, reactions are divided. American steel producers have welcomed the tariffs, anticipating increased competitiveness. Conversely, domestic secondary steel & allied manufacturers that rely on cheaper imported metals are concerned about rising input costs. The National Foreign Trade Council has expressed apprehension regarding the broader economic implications, particularly for American goods manufacturers.

As highly expected, on Monday Trump enacted a 25% tariff on all steel and aluminum imports, set to commence on March 12. The tariffs apply to all nations without exceptions. In 2024, the U.S. imported approximately $49 billion worth of steel and aluminum. Trump says the U.S. manufacturing sector has been "attacked by both allies and adversaries" and that his administration needs to ensure steel and aluminum are produced domestically.

These developments represent a significant shift in U.S. trade policy under Trump, with potential widespread effects on both the domestic economy and international trade relations. The latest round of tariffs is likely to provoke retaliatory actions from impacted countries, including some of the United States's closest allies, increasing the risk of new trade disputes on several fronts. Trump stated he would give "serious consideration" to excluding Australia from the tariffs after discussions with Australian Prime Minister Anthony Albanese.

Directly Impacted countries/Trading Partners are Canada, which is the leading source of steel and aluminum, followed by Mexico (Steel), Brazil, South Korea (Steel & Aluminium), Germany, Japan (Steel), UAE, and China (Aluminum).

Trump sees tariffs as a way to raise revenue, remedy trade imbalances, and pressure countries to act on US concerns/narratives. He has also vowed "reciprocal tariffs" to match levies that other governments charge on US goods. Trump's trade advisor, Peter Navarro, said the measures would help U.S. steel and aluminum producers and shore up America's economic and national security. These tariffs could lead to significant frustration and strain among U.S. trading partners.

Trump’s EO text shows:

·       The Secretary found and advised me of his opinion that steel articles are being imported into the United States in such quantities and under such circumstances as to threaten to impair the national security of the United States

·       I have determined that steel articles imports from these countries threaten to impair national security, and I have decided that it is necessary to terminate these arrangements as of March 12, 2025.  As of that date, all imports of steel articles and derivative steel articles from Argentina, Australia, Brazil, Canada, EU countries, Japan, Mexico, South Korea, and the United Kingdom shall be subject to the additional ad valorem tariffs

Furthermore, Trump ruled out the possibility of exemptions or exceptions to the newly imposed duties. The tariffs will apply to all countries although Trump also stated that an exemption for Australia will be considered after his phone call with the latter country's Prime Minister Anthony Albanese. At the same time, Trump warned the tariffs could be higher, stating reciprocal tariffs would also be levied in the next 48 hours. The president replied he would not mind if other countries responded with retaliatory tariffs. "We want tariffs to be fair, if they charge us, we charge them”.

History of Trump's Metal Tariffs 

Trump’s tariffs on metals, particularly steel and aluminum, have been a major part of his trade policy since his first term.

Initial Tariffs (2018 - Section 232 Tariffs)  under Trump 1.0:

·       March 2018: Trump imposed a 25% tariff on steel and a 10% tariff on aluminum imports under Section 232 of the Trade Expansion Act of 1962

·       Justification: National security concerns—argued that the U.S. needed a strong domestic steel and aluminum industry

·       Affected countries: Initially applied to nearly all nations, but some allies’ negotiated exemptions later

Exemptions and Adjustments (2018-2019) 

·       Canada and Mexico: Temporary exemptions were granted, but tariffs were reimposed in mid-2018, leading to retaliation. Eventually, tariffs were lifted in May 2019 under the USMCA trade deal. 

·       European Union, South Korea, Brazil, and Argentina: Some countries negotiated quota-based exemptions instead of tariffs

·       China: Faced additional tariffs beyond steel, part of Trump’s broader trade war

Expansion and Retaliation (2019-2020) 

·       January 2020: Trump extended tariffs to derivative steel and aluminum products, such as nails and car bumpers

·       Retaliation from trading partners: The EU, Canada, China, and others imposed counter-tariffs on U.S. goods like whiskey, motorcycles, and soybeans. 

Biden's Adjustments/exemptions (2021-2024) 

·       2021: Biden relaxed some tariffs, particularly for the EU, replacing them with tariff rate quotas instead

·       2022-2023: Further negotiations with Japan and the UK led to more exemptions

·       The Biden administration replaced Trump's Section 232 tariffs on EU steel (25%) and aluminum (10%) with tariff-rate quotas, allowing limited volumes duty-free. This agreement aimed to ease transatlantic tensions and promote sustainable trade practices

·       Global Arrangement Negotiations: Talks on a "Global Sustainable Steel Agreement" to address overcapacity and carbon emissions were extended to 2024 due to unresolved issues. This delays potential structural changes, maintaining current quotas

·       Extensions: The Biden administration has kept most Section 232 tariffs in place, despite criticism. These tariffs, initially set in 2018, underwent a statutory four-year review in 2022, with the U.S. Commerce Department recommending their continuation for national security and industrial viability.

Trump’s 2025 Tariff Expansion 

·       February 10, 2025: Trump reinstated and expanded the 25% tariff on all steel imports, removing exemptions from allies to be effective from 12th March’2025 or until further notification

·       Goal: Boost domestic production and reduce reliance on foreign steel. 

·       Concerns: Higher costs for manufacturers, inflation, and trade tensions

‘Tariff King’ Trump has a history of imposing tariffs on imported steel and aluminum, beginning in 2018 during his first term as president. In February 2025, he reinstated and expanded these tariffs. Trump announced sweeping tariffs on foreign steel and aluminum, reinstating a 25% tariff on steel and raising the aluminum tariff to 25%. Unlike his first term, no exclusions were allowed. According to Trump, these measures were intended to strengthen domestic manufacturing and put the United States on equal footing with other nations. But this time, Trump has also kept open the negotiation window on metal tariffs as it would be implemented from 12th Mar’25.

These tariffs have faced both support and criticism. Domestic steelmakers and the United Steel Union have generally welcomed the tariffs as a means to protect American industries. However, some domestic companies, along with allies like Canada and Mexico, have expressed concern over the potential for increased costs, trade wars, and destabilization of the global economy. Overall, Trump tariffs could hurt economic growth intensify inflation by almost +0.7%, and cause an average increase in the cost of living by around $1200/M for a typical US middle-class household. Trump has proposed a 10% universal tariff on all imports and up to 60% on Chinese goods if re-elected. This includes reinforcing metal tariffs, potentially escalating trade tensions, and impacting global supply chains.

Anti-Circumvention Efforts:

·       Enforcement Actions: The U.S. has intensified measures against Chinese steel and aluminum transshipped via Mexico, Vietnam, and other countries. Recent investigations aim to close loopholes, ensuring tariffs effectively target Chinese overproduction.

WTO and Legal Challenges:

·       WTO Rulings: The WTO repeatedly ruled against Section 232 tariffs as protectionist, but the U.S. has disregarded these decisions. Legal challenges domestically have also struggled, given presidential authority under trade laws.

U.S. steelmakers advocate for sustained tariffs, crediting them with boosting production and investment. Conversely, manufacturers face higher costs, fueling inflation debates. The EU and China maintain retaliatory tariffs on U.S. goods, though the EU paused these under the 2021 quota deal. China continues to challenge U.S. policies through WTO disputes.

USMCA Context:

·       North American Exemptions: Canada and Mexico secured exemptions under USMCA, though Trump briefly imposed tariffs in 2018-2019. Current trilateral trade avoids metal tariffs, focusing on integrated supply chains

Economic and Political Implications:

·       Inflation Concerns: Higher tariffs contribute to higher consumer prices (higher imported inflation), complicating Biden's economic messaging. Trump's proposed escalations could exacerbate this.

·       Election Dynamics: Tariffs remain a polarizing issue, with bipartisan skepticism over executive trade powers. Legislative efforts to curb Section 232 authority have stalled, keeping tariffs a key presidential policy tool.

Conclusion:

While the Biden administration moderates Trump's metal tariffs through negotiated quotas and sustainability talks, the legacy of Section 232 tariffs persists. Trump's 2024 campaign threats signal potential dramatic shifts, keeping global markets on alert. The interplay of trade policy, domestic industry, and international relations continues to shape the trajectory of U.S. metal tariffs, which Trump may also continue in his 2nd term.

Gold surged following President Donald Trump's announcement of new tariffs on steel and aluminum imports, reaching record highs. This is due to the increased uncertainty in global financial markets and rising demand for safe-haven assets.

Key factors contributing to the rise in gold prices:

·       Safe-haven demand amid lingering Gaza war uncertainty: Gold surged after Gaza war broke out in Oct’23

·       Fed easing cycle: Gold was also boosted by the Fed easing cycle and QT tapering from early 2024

·       Trump's tariff threats have amplified the appeal of gold as a safe store of value during uncertain times. Investors tend to move towards safer assets like gold when trade tensions and economic uncertainties increase.

·       Global economic uncertainty: The announcement of tariffs has led to concerns about a potential escalation of trade wars, which could negatively impact global economic growth

·       Inflation Worries: Trump Tariffs may exacerbate inflation within the US by around +0.7% if implanted at face value; Concerns about higher inflation and slower economic growth are spurring demand for safe-haven assets

·       Growing devaluation of local/paper currency: Gold is a major beneficiary of increasing public deficit, debt, and currency devaluation; Trump’s tariff policies hurt almost all major global currencies against USD, which is benefitting as a trade war currency. But even with higher USD/US bond yields, Gold (XAU/USD) is getting some boost against USD as Trump’s expansive fiscal policies may be negative for UST as more UST may come into circulation as a result of Trump’s tax cuts, various fiscal stimulus even after considering higher Trump tariffs (import duties)

·       Central bank buying: EM/BRICS Central banks, particularly China's PBOC, India’s RBI, and the Central Bank of Poland and Turkey have been increasing their gold reserves, signaling a commitment to diversifying their FX holdings and also to combat local currency devaluation against USD amid Trump trade war tantrum and uncertain bellicose policies. Central banks added 1,045 tonnes to global gold reserves. Central banks have been net buyers of gold for the past 15 years. The National Bank of Poland was the top buyer with 90T, followed by the Reserve Bank of India (RBI) with 72.6T and the Central Bank of Turkey.

Precious metals Gold has been seen as an inflation hedge, a haven physical asset for centuries:

In the last few weeks, gold waved on Trump's trade war tantrum mostly on the downside as higher Trump tariffs including reciprocal tariffs are positive for USD/UST. But Gold and Silver also surged in the last few days since Monday (10th Feb’25) after Trump talked about metal tariffs imposition. The market may be now apprehending Gold itself might be taxed by Trump.

Will Gold Itself Be Taxed?

·       Unlikely Directly: It's less likely that there would be a direct tax specifically on gold itself (like a tariff on gold imports).

·       Indirect Effects: The more likely scenario is that gold's price is indirectly affected by broader economic policies; if Trump tariffs cause economic disruption, there may be more demand for Gold and the price may further surge

·       Capital Gains Tax: There may be a capital gain tax on Gold in the future on ETF/derivative etc, but may not be in physical form

The US has a healthy demand for physical gold across investment, jewelry, and industrial sectors, met by a combination of domestic mining, imports, and recycling. Currently, there are no tariffs on gold imports into the US. If tariffs were imposed, they would likely increase costs, potentially reduce demand, and shift supply patterns. But tax or no tax, the physical demand has increased suddenly for the last month after Trump's inauguration on 20th Jan’25. BOE is now scrambling to supply physical Gold, while Gold premium is now around $3020 against the spot price of around $2905 and future price of $2935. The market is now expecting spot Gold (XAU/USD) to reach around $3000 by the next few weeks.

Conclusions:

Theoretical price/fair valuation of Gold:

Inflation-Adjusted Gold Price:

Gold Price= (CPI Index-2024/ Base Year CPI Index-2020)* Base Year-2020 Avg Gold Price= (314/259)*1850

=$2242

M2-Money Supply adjusted Gold Price:

Gold Price= (M2-Dec’24/M2-Jan’20)* Base Year-2020 Avg Gold Price= (21.5/15.4)*1850

=$2583

Gold-to-S&P 500 Ratio

Gold is sometimes valued relative to stocks.

Historical Gold/S&P ratio: ~0.5

S&P 500 (2024): ~5975 (average)

Price of Gold: 5975*0.5=$2987

Average Fair Value of Gold: (2987+2583+2242)/3=$2604

Overall, the average fair value of Gold may be now around $2600 against present levels of $2900. Looking ahead Gold may correct due to various reasons:

·       Gaza and Ukraine war permanent ceasefire and lower geo-political tensions under Trump 2.0

·       Less hawkish approach by Trump 2.0 on tari9ffs and immigration, resulting in relatively muted inflation

·       Less dovish Fed monetary policy and higher USD/US bond yields

Bottom line:

Gold may have surged too much above its fair value for various reasons in the last year, especially after the Gaza war started in Oct’23 amid a central bank buying spree led by EM central Banks like India’s RBI, Poland National Bank, and Turkey Central Bank. But in 2025, we may not see so much Gold buying by EM central banks due to USD scarcity and less hawkish Trump trade war tantrum 2.0. Deal maker Trump is already using tariffs threat as a tool to get concessions in not only trade deals but also various diplomatic and geo-political issues. Trump may also make some trade deals with the affected countries for his metal and reciprocal tariffs.

And Trump may not launch another all-out trade war with China, the 2nd largest economy in the world. Trump will maintain friendly competitive relations with China for mutual benefit. Trump will also keep good trading and diplomatic relations with Canada, Mexico, and the EU. Businessman/developer Trump is already making it clear that the US will control Ukraine’s rare earth reserve and Gaza strip instead of the huge funding assistance to Ukraine and Israel. Trump will also ensure the reconstruction of Gaza and Ukraine by US developers.

Weekly-Technical trading levels: Gold

Looking ahead, whatever the fundamental narrative, technically Gold (CMP: 2895) has to sustain over 2960-2975 for a further rally to 3000/3025; otherwise sustaining below 2950 may again fall to 2850/2790 and 2770/2755-2725/2690 and further 2675/2655-2610/2560 in the coming days.