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Can Gold Benefit from the US Trade Deficit’s 9-Year High?

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US trade deficit widens

The US trade deficit rose a higher-than-expected $53.1 billion in December 2017. The trade balance is the difference between imports and exports. Economists polled by Reuters were expecting the deficit to come in at $52.0 billion. In 2017, the trade deficit surged 12.1% to $566 billion, its highest level since 2008.

Even as a percentage of gross domestic product (or GDP), the deficit was higher at 2.9% compared to 2.6% in 2016. The widening deficit could suggest a drag on economic expansion in 2018 as well.

The widening deficit comes at a time when President Donald Trump has repeatedly vowed to shrink the trade gap by reducing unfairly traded imports into the country.

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Tax reform and deficit

The tax reform passed by the US administration in December 2017 is expected to put further pressure on the deficit as cuts stimulate the consumption of capital and consumer goods, which means more imports. Moreover, the US economy is at full employment right now. Higher consumption will likely be met by more imported goods, which will worsen the trade deficit.

Impact on gold

The relative value of the US Dollar Index compared to other currencies is affected by changes in the balance of trade. Because a deficit implies that foreign goods are in demand, the demand for foreign currency rises. This rise causes outflows of the dollar to rise. Over an extended period, this leads to the devaluation of the dollar.

Overall, a worsening trade deficit scenario is usually positive for gold prices and ETFs such as the SPDR Gold Shares ETF (GLD). It’s also positive for gold stocks such as Barrick Gold (ABX), AngloGold Ashanti (AU), B2Gold (BTG), and Yamana Gold (AUY). Collectively, these four stocks make up 13.7% of the VanEck Vectors Gold Miners ETF (GDX).

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