(Kitco News) - If investors are surprised that gold sold off this week, they haven’t been paying attention.
On Wednesday, President Donald Trump unleashed a level of chaos the market hadn’t seen in decades. Uncertainty has been running rampant for the last few weeks and months, but there were expectations that Trump’s tariffs would be targeted and limited. Instead, the President imposed some of the biggest import tariffs America has ever seen.
With one comically large poster board, Trump upended global trade. In the words of one trader: “Economic uncertainty has been replaced with certain economic destruction.”
U.S. tariffs - and the growing trade war they kicked off - have created the biggest global supply chain disruption since the world was forced to shut down due to the COVID-19 pandemic.
Overleveraged equity markets are taking a huge hit, as investors are now forced to deleverage their positions in the face of slower economic activity and rising inflation. The S&P 500 ended the week down 9%, its biggest loss since May 2020.
And yet, even amid all this destruction, gold still managed to do its job. Yes, it's down on the week, ending a five-week winning streak, but it still far outperformed equity markets — falling only 2.5%.
Spot gold is holding support above $3,000 an ounce, but analysts are warning investors that it has room to fall further, potentially testing support as low as $2,800 an ounce.
While it’s not recommended that investors jump in now and try to catch a falling knife, analysts have said that this selloff in gold could eventually attract new investors to the marketplace.
In this new trading regime, the factors that drove gold to $3,000 have only strengthened. Some analysts have noted that Trump’s tariffs show the U.S. has become an unreliable trading partner.
Even before Wednesday’s announcement, analysts at major banks were warning investors that ‘America First’ policies could quickly transform into ‘America Alone’, as nations seek new trading partners.
If the global trade war escalates, central banks could also take steps to diversify away from the U.S. dollar at a much quicker pace. As a monetary metal, gold continues to be the biggest beneficiary.
While gold will likely continue to perform well in this environment, it’s important to remember that not all precious metals are equal. Although silver is recognized as a monetary metal, more than half of global demand comes from industrial applications.
The global deleveraging has caused significant damage to silver, as prices ended the week down nearly 14% after falling below $30 an ounce. The gold:silver ratio has jumped above 100 points, and is now at its highest level since June 2020.
Many analysts have been bullish on silver because of the global economy’s shift toward electrification, but the metal is far from recession-proof. Slowing economic growth due to global trade disruptions will reduce demand for all industrial metals, including copper and silver.
However, even with this disappointing performance, analysts are not ready to give up on silver. The metal is expected to eventually play catch-up to gold once fears over global trade begin to ease.
Despite all the chaos, I hope everyone is able to have a restful weekend.
