By now, you have probably heard about President Trump's desire to impose a 25% tariff on imported steel, and 10% tariff on imported aluminum. While many are treating this as a surprise announcement that nobody saw coming, he began talking about this during the presidential campaign. Plans to do this were firm enough that articles were written in July of 2017, discussing the potential impacts of such a policy. While there is much disagreement about what the resulting economic climate will be, we do have some history to use as a guide. As Mark Twain is reported to have said, “History doesn't repeat itself, but it often rhymes.” As such, there are some important implications for gold and silver to consider.
Steel Tariffs of the Past
The most recent time we have to reference a steel tariff being imposed, was in March of 2002, under then President George W. Bush. Steel prices had been languishing, and were 43% lower than 7 years earlier, in 1995. This had taken a negative toll on the American steel industry, which the President sought to correct. While it did help to get steel prices back up, and increase employment at US steel mills, it also raised input costs for other industries. I remember managing a new construction project at the time, which we completed in 2004. When I called our metal building contractor to touch base upon completion, he said, “Bill, it is crazy now. We cannot even give a quote for metal for more than a few days, because the prices are rising so fast.” Made me glad we had locked in our price in 2002, before the effects of the tariffs had been realized. While gold was not specifically targeted, the timing of these tariffs coincided with the beginning of a climbing market for gold, as well as steel.
Proponents of this plan point out that the United States has been subsidizing much of the world since the end of WW II, which has contributed greatly to our large and continuing trade deficits. The Commerce Secretary, Wilbur Ross, said that while that policy was appropriate while the rest of the world was trying to rebuild after the war, there should have been a time limit on the policy, to end it back in the 1970's. He doesn't believe we need to continue to subsidize nations and economies that are rebuilt, mature, and growing. Instead, the current administration believes that our own economy, infrastructure, and industries need to be rebuilt. Secretary Ross estimates that 100,000 American jobs have been lost in the steel industry alone, which these tariffs hope to address.
Some have questioned why the tariffs being considered are general, and not targeted towards certain countries. One of the reasons given for a generalized tariff was recently illustrated by the actions of a Chinese billionaire, who stored 6% of the world's aluminum supply in the Mexican desert as a staging area to import into the US, as a way to get around targeted tariffs. This is just one example of many, to explain why a more generalized tariff approach might be necessary. The administration makes the further case that a trade war has been going on for a long time, without the US fighting back. It turns out that many of our trading partners have been using tariffs on US made products, in part to help protect their own industries, at the expense of ours.
Applying Retaliatory Tariffs
Not everyone agrees that applying retaliatory tariffs will produce a net benefit. Some believe that it might cost more jobs in other industries, than it saves in the world of aluminum and steel.
But regardless as to the effects on employment in any given industry, what is also important is the effect on prices and inflation. That is, how the costs of goods and services can be affected when tariffs are imposed on imported materials or products. The answer to this question appears to have more agreement between opposing camps, than the question of jobs. The view of both the proponents and opponents of the President's proposed tariffs is that costs will rise. The only point of contention concerns how much they will rise.
Using the previous tariffs of 2002 as a guide, the price (in fiat currency terms) for steel rose 39% while the tariffs were in place. But the price of steel continued to rise the following year as well; 132% higher than when the tariffs were put into place. The price of silver rose 27% while the tariffs were in place, and was 73% higher the following year, than when the tariffs began. Gold also benefited with the steel tariffs, rising 43% while the tariffs were in place. The following year, gold was 57% higher than when the steel tariffs began. From here, it gets more interesting. In the 4 years following, steel maintained its' price, fluctuating in a narrow range. But the ensuing inflation on other goods and services helped to spur gold and silver onward. Gold continued climbing, from $291 per ounce when steel tariffs began, to $974 in 2008, a 335% increase. Silver climbed from $4.52 in 2002, to $19.81 in 2008, an increase of 438%.
One of the phenomenons that also happened in the stock market, was believed by many to be correlated with steel tariffs of the time. The stock market lost 30% of it's value, during the time of the last steel tariffs. This possible effect continues to be a concern of some, about the proposed tariffs today. Add to that, a possible downturn in the value of the US Dollar. During the last round of steel tariffs, the Dollar lost 22%, while the tariffs were in place. (dollar graphic) This serves as a loss multiplier, for those invested in the stock market. Stocks down 30%, and the Dollars in your bank account or pocket buy 22% less. A decreasing Dollar works against us even when the market rises, as we wrote about.
Ramifications of Steel Tariffs?
While we do not know all the details, duration, or ramifications of this round of steel tariffs, certain results are likely. It is likely that the cost of steel and aluminum in the US will rise. It is likely that the cost of goods produced with steel or aluminum will rise also. And if history is any guide, the general ensuing inflation will likely lead to downward stock prices, a falling Dollar, and rising prospects for gold and silver. If you have a large back yard, you could buy several tons of steel now, ride out the tariffs, and sell later for a gain. But the steel would probably rust. The same amount of money would buy silver the size of a dictionary, or gold that would fit in a juice glass. They won't rust, and will probably rise more than steel, in fiat money terms. Until next time...