Will Tax Bill Sink Gold?

This week, the U.S. Congress approved the tax bill. What does it mean for the gold market?

So it finally happened. After months of struggle, the U.S. lawmakers passed a tax reform on Wednesday. Now, Trump has to sign it into law. What’s in the final version? The bill maintains current seven tax brackets for individuals, but temporarily lowers most income levels and rates for each one. It also increases the standard deduction.

The major change for corporations is a permanent cut in corporate income tax rate from 35 to 21 percent. The bill also exempts U.S. corporations from U.S. taxes on most future foreign profits and allows businesses to immediately write off, or expense, the full value of investments in new plant and equipment for five years.

What does the bill imply for the gold market? Well, it depends on the reception of the reform by the markets. So far, the reaction has been rather muted. It seems that we are seeing a pattern of “buy the rumor, ignore the fact”. Indeed, gold prices are little changed, as one can see in the chart below. The reason is that the bill was widely expected and already priced in.

Chart 1: Gold prices over the last three days.

Markets always look to the future. Hence, gold prices will depend how the tax reform will shape the expectations. If the markets focus on the rising national debt (due to the tax cuts), the price of gold should rise. On the other hand, if Trump’s success restores the Trump trade and shifts the traders’ attention to the spending bill, the yellow metal will struggle. We believe that the second scenario is a bit more probable. We are not betting on a plunge in gold prices, but the main threat for the U.S. dollar bulls – i.e. the risk of not passing the tax bill (the U.S. Congress also averted a government shutdown this week) – has been removed. Given the positive macroeconomic outlook, we expect rather improved risk appetites, which would not be positive for the gold market. Moreover, the renewed conflict about Catalonia could also support the greenback – the old enemy of the yellow metal.

Merry Christmas and a Golden New Year!