Trade wars are periods of intense economic tension between countries, where tariffs and trade barriers replace diplomatic agreements. These conflicts disrupt global commerce and create widespread uncertainty. As investors seek protection from market instability, gold consistently emerges as a favored asset. During trade wars, the precious metal tends to perform exceptionally well, acting as a hedge against risk, inflation, and currency depreciation.
This article explains in detail how gold behaves during trade wars. It discusses the gold price impact of tariffs, the rise of safe haven assets in trade conflicts, and the growing influence of central bank gold buying. You’ll also discover how gold functions as an inflation hedge and why its demand spikes whenever trade disputes erupt.
Why Trade Wars Drive Gold Demand?
Gold tends to gain ground whenever trade wars escalate. Investors fear economic slowdowns caused by tariffs and protectionist measures. These concerns push them away from volatile assets like equities and into commodities such as gold.
During the 2018–2019 U.S.–China trade war, gold rallied more than 20%. This surge was not just due to investor fear. Several economic changes unfolded:
- Central banks adopted dovish policies in response to slowing trade.
- Currencies fluctuated sharply, especially the yuan and dollar.
- Inflation expectations rose due to tariff-driven cost increases.
The gold price impact of tariffs became visible as early as 2018. When the U.S. imposed duties on Chinese goods, gold reacted positively. Each new round of tariffs sent shockwaves through the markets and lifted gold prices higher.
Gold Price Impact of Tariffs Explained
Tariffs increase the cost of imported goods. When producers pass these costs to consumers, inflation rises. That is when gold shines. It acts as a shield against rising prices, offering stability in purchasing power.
Gold as inflation hedge is not a new concept. Historically, gold has protected investors from the eroding effects of inflation. During trade wars, this protection becomes even more vital. The correlation between tariffs and inflation becomes stronger when trade disputes last for months or years.
Take this real-world example:
- In mid-2019, when the U.S. threatened 25% tariffs on $300 billion worth of Chinese goods, the U.S. stock market dipped.
- Simultaneously, gold soared past $1,500 per ounce.
- This spike coincided with increased volatility and higher inflation forecasts.
As tariffs persist, companies pay more for raw materials, logistics, and labor. Consumers, in turn, deal with inflated prices. Gold provides a hedge in this inflationary environment.
Central Bank Gold Buying Accelerates in Trade Wars
Central banks closely monitor global trade dynamics. During trade wars, they often seek to reduce dependence on foreign currencies, especially the U.S. dollar. One way to do this is through gold accumulation.
Central bank gold buying increases during periods of geopolitical risk. From 2018 to 2020, several central banks — including those in Russia, Turkey, and China — increased their gold reserves. Their motives were clear:
- Reduce reliance on dollar reserves.
- Strengthen sovereign financial independence.
- Diversify portfolios to include non-debt assets.
This rise in official sector demand supports gold prices. When countries move away from foreign currency assets, the result is long-term upward pressure on gold. Central bank gold buying adds a new layer of stability and investor confidence in the metal.
Examples from the past support this trend:
- Russia added over 200 tons of gold in 2018 alone.
- China resumed gold purchases after a three-year pause in 2019.
- European central banks halted gold sales and shifted toward reserve building.
This institutional demand creates a floor for gold prices, especially during prolonged trade disputes.
Safe Haven Assets in Trade Conflicts
Trade wars trigger a rush to safety. Investors abandon riskier assets like emerging market stocks or high-yield bonds. Instead, they move capital into safer options.
Safe haven assets in trade conflicts include:
- Gold
- U.S. Treasuries
- Swiss Franc
- Japanese Yen
Among these, gold offers unique benefits. It is tangible, finite, and free from counterparty risk. Unlike currencies, it cannot be devalued by central banks. Its independence from national economies makes it the ideal safe haven during global trade disruptions.
During the U.S.–China trade war, gold ETF inflows surged. SPDR Gold Shares (GLD) and iShares Gold Trust (IAU) recorded multi-billion-dollar increases in holdings. Retail and institutional investors both played a role in this demand surge.
The performance gap between stocks and gold was evident:
- In May 2019, U.S. equity markets declined by over 6% due to tariff concerns.
- Gold gained over 7% during the same month.
These figures reflect how powerfully trade war anxiety can shift capital toward gold and other safe haven assets.
Currency Volatility and Gold’s Resilience
Trade wars frequently spark currency battles. Countries attempt to weaken their own currencies to offset the impact of tariffs. Currency depreciation boosts exports but creates instability.
Gold benefits in several ways:
- Weaker currencies increase demand for gold in local terms.
- Investors use gold to protect against foreign exchange losses.
- Volatility in forex markets increases the appeal of hard assets.
In 2019, China allowed the yuan to fall below the 7 per dollar level for the first time in over a decade. In response, gold spiked immediately. Chinese investors turned to gold as a safe alternative to their weakening currency.
This scenario plays out globally during trade wars. Whether it’s the euro, yen, or Indian rupee, any sharp currency moves tend to fuel gold demand.
Gold as Inflation Hedge During Trade Conflicts
Inflation is often a consequence of prolonged trade wars. Tariffs increase production costs, which companies pass on to consumers. In response, inflation metrics begin to rise.
Gold as inflation hedge becomes critical during these periods. The metal has retained value through hyperinflation, stagflation, and commodity shocks. In every scenario, it held up better than paper assets.
In 1979–1980, during a period of oil embargoes and inflationary pressure, gold skyrocketed from $200 to over $800 per ounce. Trade conflicts between the U.S. and OPEC countries contributed to this surge.
More recently:
- The 2018–2020 trade war created inflationary fears globally.
- Even with moderate CPI readings, forward-looking expectations pushed gold higher.
- Investors anticipated supply shortages, tariff hikes, and consumer price increases.
These inflation signals drove gold ownership higher, both in physical and paper markets.
Investor Strategies to Trade Gold During Trade Wars
Investors looking to profit from gold’s strength in trade wars can adopt multiple strategies:
- Buy physical gold through coins or bars.
- Invest in gold ETFs such as GLD or IAU.
- Trade gold futures on COMEX for leveraged exposure.
- Allocate gold in a diversified portfolio for risk management.
Prudent investors often combine these methods. For example, long-term holders may keep bullion for wealth preservation, while traders use futures to speculate on short-term price moves.
Key considerations when trading gold during trade wars:
- Monitor tariff announcements and central bank policies.
- Watch currency moves for signs of devaluation.
- Track gold ETF inflows as a proxy for institutional demand.
Using gold during trade wars is not about speculation. It’s about preserving capital during economic shocks. A 10%–15% gold allocation can hedge a portfolio from trade-related volatility.
Conclusion: Gold’s Role During Trade Wars Remains Unmatched
Trade wars create a perfect environment for gold appreciation. As governments impose tariffs and global commerce slows, investors seek safe, stable assets. Gold rises in value due to its role as a hedge against inflation, currency risk, and systemic uncertainty.
The gold price impact of tariffs becomes more pronounced with each trade escalation. Safe haven assets in trade conflicts gain strength, and central bank gold buying reinforces long-term bullish sentiment. Moreover, gold as inflation hedge continues to protect portfolios against rising costs and fiat currency devaluation.
As long as economic nationalism, supply chain friction, and protectionist policies remain relevant, gold will retain its importance in global investment strategies.
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This post is originally published on EDGE-FOREX.
