Why Gold May Shine in a Trade War Regime
Spot gold prices posted fresh records in April, clearing US$3,200/oz for the first time on record and pushing year-to-date price returns north of 20%.1 So, what are the potential implications of Liberation Day economic policies and rising trade tensions on the gold market?
The gold market remains highly fluid. But we see five primary channels impacting it as policy evolves:
1. Higher Uncertainty Premium
The reciprocal tariffs proposed by the Trump Administration in April introduced a significant layer of macro uncertainty for investors who were already grappling with higher volatility and drawdown risks. Indeed, gold posted its strongest quarterly return since 1986 in 1Q’25,2 prior to the US tariff policy announcement.
Trade policy is fluid. It’s possible that bilateral deals will be negotiated, and tariff rates may be scaled back. Yet the probability distribution of outcomes is widening. And the timing is unclear. That dispersion risk should, on balance, benefit gold allocations and ETF inflows.
While there has been a temporary 90-day pause on the implementation of the higher tariff rates (ex-China), markets don’t know the end game for world trade policy. This can create a feedback loop of anxiety that further curtails consumer spending, challenges business investment and capex, and weakens job growth. A re-rating of US growth exceptionalism and corporate earnings outlooks should buttress investor demand for gold as a safe-haven* asset.
2. Potential Acceleration of De-dollarization Trend
The market perception under a more protectionist and mercantilist world order should favor onshoring gold reserves. This is on the back of record official sector gold purchases from 2022 to 2024. That may be incentivizing gold investors to buy an asset that could experience further demand growth from the most price inelastic buyer — national governments. For example, if central banks purchased 35-40% of annual gold mine output versus the 2022-2024 pace of 25-30%, bullion prices would likely need to be significantly higher to both ration other pockets of demand and incentivize a gold scrap response.
One striking aspect of the April market swoon is that it wasn’t limited to the US stock market. There has been a sharp back-up in Treasury yields at the belly and particularly back-end of the curve amid a sell-off in the US dollar. At least in the very short run, Treasury bonds have not provided investors with portfolio protection. Gold is also benefitting from the denomination effects of a weaker greenback. Whether this a crisis of confidence in US financial dominance and reserve currency status is anybody’s guess. But the fact that the question is being asked across Wall Street is a concern worth noting. And if sustained, that concern could structurally benefit gold. Investors will soon find out if foreign bond sales were a culprit later this quarter, when the US Treasury Department releases its TIC report for foreign Treasury holdings for April. That said, it seems that elevated global trade tensions — and a bilateral geoeconomic US-China stand-off — will have a lingering impact on gold demand even if deals are cut. Especially if there is lost “trust” in US policy toward globalization and in maintaining the dollar’s status as the reserve currency.
3. Increased Recession / Stagflation Risks
Even before the April 2 tariff announcement, we had been flagging that the gold market was signaling concerns about the US economy. Based on recent historical analogs, measures of the gold/silver price ratio or the S&P 500 in gold terms point to heightened risk that the US has already entered recession or could do so later in 2025. The April sell-off in crude oil prices and time spreads further reflects the risk of a potential aggregate demand shock to the downside and market expectations of reduced fuel demand and trade flows.
A higher modal probability of US stagflation (echoed in the March FOMC comments and recent Fedspeak3) — even if it is not the base case — should support gold investment demand.
US-Sino trade tensions appear to be escalating and could be enduring. An economic standoff between the two largest economies in the world, representing about 45% of global GDP4 is clearly a risk to the global growth outlook. China is also the second-largest trading partner for the US, and tit-for-tat tariff escalation could stifle supply chains, challenge logistics, and prove to be inflationary for goods.
This puts the Fed in a pickle when it comes to normalizing policy rates in a sluggish growth environment. It may also incentivize economies beyond China to increase gold holdings as part of their official reserves.
Gold tends to perform during and exiting a recession. This was observed during the aftermath of the Global Financial Crisis and in 2020 during the COVID pandemic.5 Gold outperformance has also been notable more recently during periods of financial market stress, including 2022 at the onset of the Russia/Ukraine war, March-May 2023 during the US regional bank crisis, and during this current period.6
4. Drawdown and Volatility Hedge
Gold is considered a low volatility asset that is often strategically placed in portfolios to dampen the impact of equity unwinds. In March, gold prices realized seven vol points below the S&P 500. In April, 30-day US equity volatility is realizing nearly 53%, while gold price vol has been realizing at less than half of this level.7 The fact that gold provided portfolio protection in March/April but generated alpha over the past 18 months is likely to keep sentiment bullish toward the yellow metal, as financial demand catches up to robust physical demand.
5. Liquidity Hedge
The use of gold as a globally liquid and fungible asset to raise cash and rebalance portfolios can be a negative headwind for gold prices on occasion. But if gold markets continue to find buyers on the dips, over time we should see further confirmation of a new baseline price north of US$3,000/oz. Indeed, trading at the end of the week of April 7 showed gains, with gold exchanging hands at a record US$3,225-3,235/oz into the weekend, after trading below US$3,000/oz earlier in the month.
We do think gold markets will face occasional bouts of 5-7% draws in a high volatility environment. Still, the price outlook leans more bullish than bearish. Especially when cast in the shadow of a potential shift in the global trade and economic order.
If the global economic order is indeed in the midst of a realignment toward mercantilism and protectionism, these five potential structural tailwinds for the price of gold enhance our bull case scenario of gold trading to US$3,400/oz later in 2025. They also add credibility to the argument that gold could possibly scale US$4,000-5,000/oz in the next few years under certain macroeconomic conditions, such as stagflation coupled with accelerated de-dollarization.