How Will The U.S. Tax Reform Impact Gold In the Long Run?

by Trefis Team
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The U.S. Senate approved the final version of the overhaul of the US tax code on 20th December. [1] Although the new tax plan would have a negative impact on gold given the improved economic outlook due to the new tax proposal, the long term implication of the tax plan is expected to provide support to gold prices.

The major highlight of the approved tax plan is the lowered corporate tax rate from the current level of 35% to 21%. [2] This would provide a lucrative environment for multinationals to operate in the U.S. economy and is thus expected to provide a boost to the U.S. economy in the upcoming year. The Fed in its latest Federal Open Market Committee (FOMC) meeting had raised its GDP outlook for 2018 by .4% over its previous estimate of 2.1%. This revision is mainly attributable to the impact of the implementation of the U.S. tax reform. ((Fed raises interest rates, keeps 2018 policy outlook unchanged, Reuters))

Gold is considered a safe-haven asset for investment purpose and the strengthening of the U.S. economy should ideally put a downward pressure on gold prices. A larger part of the volatility with respect to the implementation of the U.S. tax reform was priced ahead of final approval of the bill and hence did not have any material impact on gold prices on Wednesday.

However, on a long term perspective, the new tax reform is expected to add $1 trillion to the U.S. national debt over a span of the next 10 years despite considering the impact of the increased growth outlook. [3] This could create an environment of global instability as the U.S. national debt is already at a very high level of $20 trillion, approximately 107% of the U.S. Gross Domestic Product (GDP). [4] Consequently, an environment of global uncertainty would increase the demand for gold as investors resort to safe-haven assets during a scenario of geo-political turmoil.

The bill is awaiting its final sign off from the U.S. President post which the benefit of the new plan is expected to be realized from 2018 onward. We shall keep a close watch as these developments take shape.

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Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for gold mining companies, including Newmont Mining and Barrick Gold.

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Notes:
  1. Trump’s tax bill: US Senate passes reform legislation, BBC News []
  2. The final GOP tax bill is complete. Here’s what is in it., Washington Post []
  3. Why it’s such a big deal the Senate tax bill would add $1 trillion to debt, Washington Post []
  4. NATIONAL DEBT OF UNITED STATES, National Debt Clocks []
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