Gold stands to benefit from trade protectionism

UNITED STATES October 17 2016 1:03 PM

NEW YORK (Scrap Register): Gold could benefit from growing protectionist views toward free trade globally, said HSBC. 

For starters, calls for protectionism suggest the masses are not happy with government policies. Gold prices tend to rise during periods of contraction in world trade, and fall during periods of above-level growth, albeit sometimes with a lag.

HSBC analysts note that the World Trade Organization cut its forecast for 2016 global trade growth by more than a third to 1.7%, reflecting a slowdown in China and falling levels of imports into the U.S. This is the first time in 15 years that international commerce is expected to lag the growth of the world economy.

“In a world where trade flows may be challenged, gold is likely to be an indirect beneficiary. Trade flows partly reflect global economic health and well-being. Declines or obstructions to trade, to the extent that they represent economic dislocation, are likely to be supportive of gold, they added.

Analysts comment that a win in the U.S presidential race by Republican Donald Trump, who has been a critic of U.S. free-trade deals, "would be especially bullish for gold.

Still, the bank noted that, both candidates are showing some level of protectionism, with Democrat Hillary Clinton raising concerns about the Trans-Pacific Partnership. Meanwhile, France, Germany and the U.S. all are cooling toward a U.S.-European Union trade deal. 

“A major escalation of protectionism could manifest itself in ways that are not immediately obviously gold-bullish,” HSBC added. For instance, this could increase the risk of competitive currency devaluations. 

"If major trading nations decide to devalue their currencies to gain competitive advantage, this could set off a fresh round of currency wars," said HSBC. “In this case, gold would be a sought-after alternative.”