NICHOLAS SHUBITZ: Rising gold price sends a warning to the US

They say markets do not like uncertainty, and nowhere is this clearer than in the recent surge in the gold price. US President Donald Trump’s trade war, combined with large fiscal deficits, has begun to undermine confidence in US assets and investors have flocked to gold as a safe haven. Gold has already breached the psychologically significant $3,000/oz level and could go even higher.

Business leaders and international investors, forced to react on a daily basis to the whims of one man, are fleeing for the sidelines, and the rising gold price is flashing a warning signal to anyone who underestimates the disruption Trump has unleashed. More than just a recipe for stagflation, Trump’s trade war could lead to a full-blown credibility crisis for the US financial system. 

This climate of unpredictability has hit US equities, with the JSE outperforming US stock markets so far this year. Though the major US indices have recovered some of their initial losses, both the Nasdaq and S&P 500 saw double-digit declines after Trump’s “Liberation Day” tariffs, and major US banks have taken notice, with both JPMorgan and Goldman Sachs predicting a $4,000/oz gold price by mid-2026.   

Under normal circumstances when equities decline investor capital flees to the relative safety of US government bonds. But after Trump’s “Liberation Day” tariff announcement US Treasury yields rose at the same time as stocks were declining, with the yield on the 10-year rising at its fastest pace since 2001. This rare occurrence signalled a loss of confidence in US economic leadership and gold has been the biggest beneficiary.    

The administration was rattled, paused most of the tariffs and US Treasuries recovered. However, inflation expectations are still rising, the dollar has weakened and the federal government is still running substantial budget deficits. Issuing trillions in bonds is less of a problem when nations can run a trade surplus with the US and recycle those dollars into US Treasuries. But with Trump disrupting global trade, investors are getting nervous that this system could break down.

That’s why Treasury yields rose so quickly after the tariffs were first announced. Investors were demanding compensation for the risk of higher US inflation and currency depreciation. The dollar index, which measures the greenback against a basket of major currencies, has dropped below 100 to its lowest level in years and could fall further if the trade war continues. At the same time, the Fed may not be able to stave off a recession at the risk of worsening inflation.    

One of the biggest issues for US assets in the context of Trump’s trade war is that while a portion of each country’s trade could be hit by tariffs (the portion each country conducts with the US), all US trade could be disrupted, resulting in far greater inflationary effects on its own economy. Despite claims from the White House that record numbers of trade agreements will be reached in record time, investors appear sceptical and the value of US assets have declined.    

Unless Trump reverses course, other countries could enjoy the benefits of free trade while the US isolates itself via protectionism. This could mean lower trade volumes leading to lower economic growth with rising input costs and higher levels of inflation in the US. Considering US GDP has already contracted in the first quarter, Trump may need to abandon his trade war entirely to avoid a recession. 

As investors begin to question the safety of their US investments, they’ve turned to other safe havens. The Japanese yen, Swiss franc and euro have all strengthened, though gold has posted the biggest gains. According to the World Gold Council, central bank gold purchases have hit record highs, with more than 1,000 tonnes added per annum, much of this driven by the Brics nations.

There has even been a run on London’s gold vaults as institutions and wealthy individuals seek physical delivery, wary of financial intermediaries and “paper” gold. Elon Musk has even publicly questioned whether Fort Knox still holds any gold at all and Trump has joined his calls for an audit of US gold reserves, further calling US financial credibility into question.

This is all taking place against the backdrop of existing efforts at dedollarisation. China will be even more motivated to internationalise the yuan in response to the trade war, India and Russia are already bypassing the US dollar in bilateral transactions and the Brics are still developing alternative payment systems. Combined with unusual levels of US Treasury market volatility, the dollar faces a combination of risk factors unseen for decades. 

Consider that Chinese 10-year bond yields are trading below 2%, which is significantly lower than their US counterpart. This is a sign investors think it is safer to lend money to China than the US, despite the global reserve currency status of the dollar. It makes sense too. Inflation is lower, government policy is more predictable, and China is the one promoting free trade.

Ultimately, the notion that US 10-year Treasuries represent the “risk-free rate of return” may no longer apply any more, with other bonds in alternative currencies having already emerged as more stable investments. Meanwhile, gold is gaining serious momentum, offering substantial stock and bond market-beating returns on both short and long term timescales. Gold rose 20%-30% in the first few months of this year and has outperformed the S&P 500 substantially since 2000.   

After the 2008 financial crisis the gold price peaked in 2011 at about $2,000, which would be the equivalent of nearly $5,000 in today’s dollars adjusted for inflation. But inflation doesn’t capture the full extent of gold’s potential because the cost of goods tend to decline as technological breakthroughs enable increased production.

This is why the increase in the supply of dollars in recent decades is more visible in financial assets rather than wages or inflation. This also explains why stocks tend to trade at far higher valuations today compared with their historical averages. As such, to get a better idea of gold’s relative value as an investment compared to equities we need to factor in market capitalisation.   

The US stock market’s total market capitalisation is more than 40 times larger today than it was in 1980, when gold spiked to $850/oz. This, once again, is about $5,000 in today’s dollars when accounting for inflation. But if gold were to reach the equivalent of its 1980 high, while factoring in the increased size of US equity markets, it could surpass $30,000/oz.    

Trump’s trade war has led investors to question the safety of US assets. This is being reflected in increased safe haven demand for gold, whose rising price is sending the US a warning. Will Trump continue to back down, or will he sacrifice the role of the dollar to fulfil his dreams of US re-industrialisation? Gold has historically performed well during periods of global economic uncertainty. The present scenario is no exception.

• Shubitz is an independent Brics analyst.