How the Uncertainty Revolving Around the U.S. Tax Reform Has Been Affecting Global Gold Prices

by Trefis Team
+1.69%
Upside
36.21
Market
36.82
Trefis
NEM
Newmont Mining
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Donald Trump, leading up to the presidential elections, had promised for a revolutionary tax reform to be introduced in the U.S. which would provide a significant boost to the U.S economic activities. The purpose of the enactment of such a reform is to create a lucrative business environment for the domestic U.S. companies and to make the U.S. market more attractive to multinationals. This would, in turn, increase the global demand for the U.S. dollar and negatively impact gold prices as the yellow metal becomes comparatively more expensive and less attractive as the dollar rises.

The initial framework of the tax reform was introduced by the U.S. House of Representatives in the beginning of the month which had led to a surge in the U.S dollar index and a consequent fall in gold prices. The U.S. index is the value of the dollar against a basket of six foreign currencies. The major highlight of the framework was the decrease in the  corporate tax rate to 20% from the current rate of 35%. The proposed bill, if passed, would be effective from 2018 forward, and hence provide a major boost to the bottom line of U.S based companies. [1]

Source:US Dollar Index (DXY) Market Watch

Source:Kitco Gold Prices

The Senate, on the other hand, introduced their framework regarding tax reform on 9th November, 2017 with some key differences. The major difference which affected the market’s perception was the possibility of a one year delay in the implementation of the corporate tax cut (from 35% to 20%) so that it would not take effect until 2019. [2]  The difference in the introduced proposals between the U.S. House of Representatives and the Senate has given rise to an uncertainty regarding the actual time frame of the implementation of the tax reform bill. This has been priced against the dollar and thus, has led to a fall in the dollar against other currencies.

Limited Upside for Gold Reaching $1300 Level

The prevailing uncertainty has led to a rebound in gold prices, however the upside for reaching the $1300 level remains limited. The latest statistic released on U.S inflation and unemployment saw significant recovery in its numbers. The U.S. unemployment rate stood at 4.1%, the lowest in 17 years. [3] This was majorly due to the country’s revival from the adversities of Hurricane Harvey and Irma which had hit the country in September. The strengthening of key economic indicators of the U.S increases the probability of an interest rate hike at the upcoming December Fed meeting.

Furthermore, as per the latest data released by the world gold council, gold demand showed a significant drop of 12% on a Y-O-Y basis. [4] With the prevalent subdued demand condition, a recovery in gold prices remains even less probable. Below is our price forecast for future gold prices.

Subdued gold prices would have significant impact on the revenues of major gold mining companies such as Barrick Gold, Newmont Mining, and Gold Corp who are already coping with an environment of diminishing revenues and preparing themselves for future subdued gold prices by systematically investing in mines which would reduce their all-in sustaining cost (AISC) and also by restructuring their level of debt.

The U.S. aims at passing the tax reform bill by the end of this month and we would be keeping a close track on how these developments take shape as it would have significant impact on global gold prices ahead of the Fed meeting in December.

Have more questions about Newmont Mining? See the links below.

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 Newmont Mining

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Notes:
  1. The good, the bad and the money: Here’s what the GOP tax bill means for you, CNBC []
  2. Here’s what’s in the Senate Republican tax plan, CNBC []
  3. The U.S. Added 261,000 Jobs in October; Here’s the Upshot, New York Times []
  4. Gold Demand Trends Q3 2017, World Golf Council []
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