While it would be an understatement to say Donald Trump has not been good for the SA economy, he has been a gift to the international gold market. And he shows every sign of being the gift that keeps on giving with his penchant for economic warfare and highly unorthodox economic policies.
Since the start of the year gold has outperformed most major asset classes. From about $2,600/oz at the start of the year its price has surged to more than $4,000, an increase of more than 50%, which has not occurred since the late 1970s.
One way that Trump has helped light a fire under gold is by intensifying the US’s weaponisation of financial policy. The dollar assets in US banks of countries deemed hostile to America, such as Russia and Iran, have been frozen, while many countries have been subjected arbitrarily to punitive import tariffs.
Among these countries Brazil stands out for being subjected to a 50% import tariff for taking legal action against its former president. More recently, Canada has had a 10% import tariff imposed on it for having run an advertisement in the US about tariffs that was not to Trump’s liking.
Trump’s readiness to use financial sanctions and import tariffs has made his country an unreliable economic partner. This has induced many of the world’s central banks to move away from the dollar towards gold in their international reserve holdings, since, unlike the dollar, gold is beyond the US government’s reach.
This has resulted in a situation where the world’s central banks’ gold holdings now constitute 20% of their overall international reserve holdings. That is a figure similar to the world central banks’ euro holdings.
After Trump’s latest action in Colombia and Venezuela there is every reason to expect that he will continue to use US military and economic leverage to achieve his political aims. In turn, that is likely to continue undermining the US as a reliable economic partner. By so doing it will perpetuate the world’s central banks’ flight from the dollar to gold.
More importantly for the gold price’s future outlook, Trump has and will continue to drive investors and the public to gold by his highly unorthodox economic policies. While the US was already running a budget deficit of 6.5% of GDP, Trump succeeded in having Congress enact his so-called One Big Beautiful Bill.
The bill is expected to add $4-trillion to the US budget deficit over the next decade and to put the US public debt on a truly unsustainable path. According to the IMF the US will run a 7% of GDP budget deficit for as far as the eye can see and by 2030 the US will have a higher public debt to GDP ratio than Italy or Greece.
Trump is now in the process of attacking the independence of the US Federal Reserve and calling for an immediate three percentage point reduction in interest rates, despite inflation running above the Fed’s 2% inflation target. It is expected to trend higher due to his import tariffs.
Trump is widely expected to name a monetary policy dove who will do his bidding when Jerome Powell’s term as Fed chair ends in May 2026. That is bound to heighten fears that America will not honour its debt commitments but will instead try to inflate its way out of its debt problem.
In the past, fears of US inflation would have driven investors to seek the safe haven of one of the world’s other major currencies. Now, as weak as the dollar’s public fundamentals might appear, those of its competitors in Europe, China and Japan appear to be equally troubled. In the absence of a real alternative currency to the dollar, investors can be expected to continue their flight to gold.
• Lachman, a former deputy director in the IMF’s policy development & review department and chief emerging market economic strategist at Salomon Smith Barney, is a senior fellow at the American Enterprise Institute.
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