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Commodities are capturing headlines as the Trump administration's on again, off again tariff announcements (extensions/omissions) have rippling effects across many sectors. In the span of two weeks, Trump's tariff plans started by targeting imports of copper and aluminum. Shortly after the initial announcement, further tariffs were announced on crude oil imports from Canada, but at a much lower rate. During this time there were also threats of tariffs on agricultural products, but those have been retracted for the most part. With the U.S being the largest agricultural exporter in the world, it would be the natural place to target if other countries wanted to place reciprocal tariffs, which is exactly what China did.
What to expect
In the short term, tariffs will have varying impacts on different commodities, with the larger risk being that all the uncertainty could result in a contraction of business activity, leading to slowdown of global growth and even a potential recession. A deep recession would be a challenging environment for most asset classes, including commodities. Stagflation¹ risks also rise as tariffs are a tax and will invariably raise the cost of many products. In the medium to longer term, the tariff war just reinforces a trend that was already in place - a trend that has global supply chains being remapped. The trend of the last few years has been that supply chains are no longer driven solely by economics but now must also be driven by issues of security, redundancy, politics and ideologies. This shifting of supply chains and parallelization is all resource-intensive.
Another consequence of tariffs is a global realization that trade is becoming less free, that you may not be able to rely on old trading partners or allies, which is forcing countries to look inward and be less reliant on those trade partners and allies. Whatever the buzzword - reshoring/near-shoring/friend-shoring – they are all attempts to be more independent, whether it be from a security perspective or economic perspective. To accomplish this, governments are embarking on a fiscal expansion that we haven't seen in a generation. The European Union (EU) just announced an $800 billion plan to "rearm" Europe². Even Germany, a stalwart fiscal conservative for decades, recently announced a historic $500 billion fund and an overhaul of debt rules to invest in the military and the economy³. China is also running a 4% fiscal deficit this year, one of its highest ever⁴. And despite efforts by the U.S department of Government Efficiency (DOGE), the U.S also finds itself running a 7% annual deficit into the foreseeable future⁵.
How does it all impact commodities?
This changing economic world order provides the perfect environment for commodities. Not only will the reorganization of supply chains and military expansion necessitate significant infrastructure investments, resulting in increased demand for energy and industrial metals, but doing so by running large fiscal deficits further pushes the world down the path of continued monetary debasement. TDAM believe this is one of the factors that took the central banks of the world from net sellers of gold from 1990 to 2010 to net buyers of gold, with that buying having accelerated of late. We see no end in sight to the fiscal largesse by the world's largest economies, and hence, see no reason why precious metals shouldn't continue to rally over the long term.
We don’t view these tariffs as a reason to get bullish on commodities. We view it as another bullish impulse for a sector that already has many tailwinds, including a lack of investment across the commodity space in the prior decade, growing power demands from artificial intelligence (AI) and the energy transition, and aging infrastructure across the developed world that is well overdue for renovation. We think all the ingredients are in place for commodities to perform exceptionally well over the next decade.
¹ Stagflation is persistent high inflation combined with high unemployment and stagnant demand in a country's economy.
²European Commission, March 3, 2025.
³CDU CSU March 13, 2025.
⁴Report on the Work of the Government, National People’s Congress of the People’s Republic of China, March 5, 2025.
⁵Federal Reserve Bank of St. Louis, March 1, 2025
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