The lengthy title of President Donald Trump’s one-page tax reform proposal sums up the means and ends of the plan: ‘2017 Tax Reform for Economic Growth and American Jobs. The Biggest Individual and Business Tax Cut in American History.’ One of the major concerns about the proposal is the lack of details on where the revenue will come from to offset such significant tax cuts. As is, the plan spells out a scenario that’s likely to have investors continue moving to safe haven assets, such as gold. 1
The introduction of the tax reform proposal has essentially made the financial forecasting water for the country a bit muddier. This is particularly so since the plan as proposed would seek growth from lower tax rates with no clear revenue sources outlined. The goal of the reductions is to make the U.S. more competitive in the global market, boost growth in the economy, and keep more corporate profits and cash in the country. One outcome many are worried about is that the already alarming levels of U.S. debt would grow even further. 2
If there are tax reductions and deficit spending continues anywhere at its current pace, the national debt will rise until the hoped for economic growth generates new taxes. That situation will create inflationary pressure. While the general media make only an occasional reference to the growing national debt, economists are increasingly focused on its significance. That debt has doubled in little more than a decade, and 2017 will close with the mark exceeding $20 trillion. Of course, this is in addition to as much as $200 trillion in unfunded liabilities. This debt has, and will increasingly have, a major impact on the U.S. economy.
The level of the U.S. debt is only part of the global debt picture that is driving increased safe haven investment in gold. Serious economists and long-term buyers of gold understand that there is a limit to the growth in unsustainable debt and ongoing uncontrolled deficit spending created by fiat currency policies.
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Inflation and Interest Rates
Again, while there is no solid consensus on what tax reforms will be passed or when, virtually everyone is noting that any decrease in tax collections without a cut in government spending will be inflationary. At the same time, if the economy does heat up, the pressure to keep interest rates low to control that inflation will create even more challenges for the Fed.
Rising interest rates historically create downward pressure on gold prices. However, with the Fed targeting a 3 percent threshold for rates by 2019, many investors are waking up to the reality that the stability and value appreciation of gold offers a superior alternative, especially in unstable political and economic times. This lack of impact of Fed rate increases on gold was shown when prices rose after the last hike.
Opportunities in Gold
The immediate consensus of many traders is that any serious delay in passage of the tax reform and the potential for contentious legislative battles will be bullish for gold in the short term. Moreover, the above factors may well create a positive environment for gold even if the economy does grow.
For long-term buyers of gold, the current volatility could present an opportunity to average down portfolios after the recent strong performance by gold. As the experts note, the long-term effect of any potential tax reform is less important than the many factors underlying historically high levels of safe haven purchases of gold.