Governments have long used tariffs to protect domestic industries, address trade imbalances, and exert political pressure. However, tariffs' economic effects often ripple beyond trade, influencing inflation, market sentiment, and the price of gold. This article explores the historical impact of tariffs on gold prices, analyzing major tariff policies and their broader economic consequences.
What are Tariffs?
Tariffs are taxes imposed on imported goods, encouraging domestic production by making foreign products more expensive. Whilst they can protect jobs and industries, tariffs often lead to higher shopper prices, supply chain disruptions, and economic uncertainty. Historically, tariffs have played a significant role in shaping global economic trends and monetary policies.
Historically, tariffs have had the following economic effects:
- Increased Inflation: Higher import costs translate into higher prices for consumers.
- Market Volatility: Uncertainty around trade wars and supply chain adjustments leads to economic instability.
- Currency Fluctuations: Tariff policies can weaken or strengthen a nation’s currency, impacting trade balances and commodity prices.
Since gold is viewed as a safe-haven asset, its price often responds to these economic shifts, rising during periods of uncertainty and inflation.
Who Pays Tariffs?
Governments impose tariffs, but businesses and shoppers pay them. When a tariff is placed on an imported product, the foreign producer does not directly pay the tax. Instead, the importing company must pay the tariff when the goods enter the country. These costs are usually passed down the supply chain, leading to higher retail prices for consumers.
For example, if the U.S. imposes a 25% tariff on steel imports, American manufacturers that rely on imported steel will pay the tariff when purchasing materials from foreign countries. To offset this expense, these manufacturers may increase the prices of their products, causing consumers to bear the financial burden. In some cases, businesses may absorb part of the tariff to remain competitive, but this can cut profit margins and lead to cost-cutting measures such as redundancies or reduced investment.
Paying tariffs involves customs duties at ports of entry. Importers must declare their goods and pay the required tariffs before products can be released into the domestic market. Customs authorities enforce these policies and ensure compliance with tariff regulations.
Will Tariffs Impact Gold?
Tariffs rarely act as a direct catalyst to drive gold prices. Instead, economic and political reactions to tariffs can impact the precious metals market. When tariffs are imposed, they increase the cost of imported goods. This often leads to inflationary pressures as businesses pass these higher costs onto shoppers. Since gold is widely regarded as a hedge against inflation, demand increases alongside inflation expectations, which typically causes its price to rise.
Additionally, tariffs can lead to trade wars, disrupt supply chains, and cause economic downturns. During downturns, investors seek safe-haven assets, which can spike gold prices depending on the overall economic environment.
Do Tariffs Work?
Tariffs have been imposed numerous times throughout history. Results vary, with many failing to accomplish their economic goals and causing severe unintended negative consequences.
Almost all instances of tariffs have caused supply chain disruptions, higher prices, and reciprocal measures from other countries. Here are some historical tariffs and how gold prices reacted:
Smoot-Hawley Tariff Act (1930)
- Economic Context: Introduced during the Great Depression, this tariff significantly raised import duties on over 20,000 imported goods.
- Inflationary Effect: Deflation, rather than inflation, dominated the period, limiting gold’s reaction.
- Gold Prices: The U.S. was still on the gold standard, with gold prices fixed at $20.67 per ounce until 1933.
This is widely regarded as a major failure. It worsened the Great Depression by stifling international trade, leading to global retaliatory tariffs, deflation, and widespread unemployment. Whilst it aimed to protect American industries, it backfired by reducing export demand and deepening the economic crisis.
UK Corn Laws and Their Abolition (1815-1846)
- Economic Context: The Corn Laws imposed heavy tariffs on imported grain to protect British agriculture, raising food prices and contributing to financial distress.
- Inflationary Effect: The tariffs increased consumer costs, creating inflationary pressures.
- Gold Prices: Gold remained stable but saw increased demand due to economic instability, reinforcing its role as a store of wealth.
The Corn Laws were meant to protect British farmers but eventually led to widespread food shortages and public unrest. The laws disproportionately hurt shoppers by making grain more expensive, exacerbating poverty. Their repeal in 1846 was seen as a triumph of free trade over protectionism.
France’s Tariff Policies Under the Third Republic (1870s-1910s)
- Economic Context: France implemented high tariffs on imported goods, including metals and agricultural products, to protect domestic industries.
- Inflationary Effect: The tariffs contributed to rising shopper prices and economic fluctuations.
- Gold Prices: Gold demand increased as inflation concerns grew, reinforcing its reputation as a financial hedge.
Whilst they protected domestic industries, these tariffs led to higher consumer prices and economic inefficiencies. Over time, they contributed to economic instability and the need for later trade liberalization.
German Tariff of 1879
- Economic Context: Chancellor Otto von Bismarck introduced tariffs on imported industrial and agricultural goods to strengthen domestic production and support economic nationalism.
- Inflationary Effect: The policy led to rising production costs and higher prices for essential goods.
- Gold Prices: Gold saw increased demand as a hedge against economic policy risks and inflationary pressures.
This policy, imposed by Bismarck, helped strengthen Germany’s industrial base and economy. It allowed the country to become a leading industrial power, creating jobs and national economic growth.
Nixon’s 10% Import Surcharge (1971)
- Economic Context: Nixon imposed a 10% import surcharge and ended the gold standard, leading to high inflation in the 1970s.
- Inflationary Effect: The move contributed to rising shopper prices.
- Gold Prices: Rose dramatically from $35 per ounce in 1971 to over $180 per ounce by 1974.
Whilst it was intended to fix trade imbalances and strengthen the U.S. economy, it was part of a broader policy that ended the gold standard, leading to high inflation in the 1970s. The surcharge was short-lived, and inflationary pressures later led to rising gold prices and economic instability.
Steel and Aluminum Tariffs (2002 – Bush Administration)
- Economic Context: The U.S. imposed up to 30% tariffs on steel imports, impacting industries reliant on steel.
- Inflationary Effect: Manufacturing costs rose, but broader inflationary effects were limited.
- Gold Prices: Gold was already in a bull market due to a weakening U.S. dollar, rising from $280 per ounce in 2002 to over $400 per ounce by 2003.
Whilst it temporarily helped protect U.S. steel producers, it also increased costs for manufacturers reliant on steel, such as auto companies. The tariffs were eventually lifted early due to economic concerns and international retaliation.
U.S.-China Trade War (2018–2019 – Trump Administration)
- Economic Context: The U.S. imposed tariffs on $300+ billion worth of Chinese goods, and China retaliated with tariffs on U.S. exports.
- Inflationary Effect: Higher consumer prices, supply chain disruptions, and market volatility.
- Gold Prices: Due to economic uncertainty, gold prices increased from $1,200 per ounce in mid-2018 to over $1,500 per ounce by mid-2019.
Whilst the tariffs aimed to reduce the U.S. trade deficit with China and revive domestic manufacturing, they led to higher shopper costs, market uncertainty, and retaliation from China. Despite some agreements in the Phase One Deal, the economic benefits were limited, and global supply chains suffered.
Post-Pandemic Tariffs & Supply Chain Disruptions (2021–2023)
- Economic Context: Trade restrictions remained in place whilst global supply chains suffered disruptions due to COVID-19.
- Inflationary Effect: Contributed to record inflation, reaching 40-year highs in 2022.
- Gold Prices: Peaked at $2,050 per ounce in March 2022 before stabilising.
These tariffs remained from the U.S.-China trade war but were part of a broader effort to rebuild domestic supply chains and manufacturing independence. However, they also contributed to inflation and supply chain bottlenecks.
Gold as a Safe-Haven Asset in Times of Economic Uncertainty
Gold has historically served as a hedge against inflation, currency devaluation, and financial instability. As a tangible asset, it retains its value regardless of economic downturns.
Investors often turn to gold when:
- Inflation erodes the value of fiat currency.
- Geopolitical tensions create market uncertainty.
- Interest rates stay low, reducing the appeal of bonds and other investments.
Gold's ability to preserve purchasing power is crucial to investment holdings, especially during tariff-induced economic instability.
How to Buy Gold: Investment Strategies and Considerations
Gold provides a reliable option for investors looking to protect their wealth from the potential economic fallout of tariffs. Here are some ways to invest in gold:
1. Physical Gold
Buying physical gold is one of the most traditional ways to invest. Investors can purchase gold bullion and coins, offering direct ownership of the precious metal. This method ensures tangible asset control, but investors must consider secure storage options, including home safes or third-party storage services.
2. Gold Exchange-Traded Funds and Mutual Funds
Investing in gold exchange-traded funds and mutual funds provides exposure to gold prices without requiring physical storage. Exchange-traded funds track gold’s price movements, allowing for easy trading, whilst mutual funds focused on gold mining companies provide indirect investment exposure.
3. Gold Mining Stocks
Gold mining stocks allow investors to gain leverage on rising gold prices by purchasing shares in companies that extract gold. Whilst mining shares can be lucrative, they come with added risks, such as operational challenges and market volatility, that can impact returns.
4. Gold Futures and Options
Gold futures and options provide an advanced investment approach, allowing investors to speculate on gold price movements. Futures contracts obligate the purchase or sale of gold at a future date, whilst options provide leveraged exposure. These instruments carry higher risks but can offer substantial rewards for experienced traders.
Preparing for Tariffs
Tariffs often create delayed reactions, as markets take time to digest their broader economic impact and for the ripple effects to play out. As we saw in the 1930s and 1970s, tariffs may start a series of economic shifts.
Still, the secondary and tertiary effects, like inflation, central bank actions, and geopolitical tensions, impact gold prices. If the United States enacts universal tariffs, history suggests there might be a rise in demand for precious metals based on their expected outcomes. However, as always, a patient and well-informed approach will serve investors best.
Markets may not respond immediately, but by understanding the cascading impacts, investors can better prepare for shifts in gold demand. Monitoring the impact of tariffs on the economy, inflation, and currency trends is crucial for making informed investment decisions. Gold has historically proven to be a resilient store of wealth, making it a critical asset in times of uncertainty.
