Senate Tax Plan And Gold

Yesterday, the U.S. Senate tax cut plan was unveiled. What does it mean for the gold market?

As we wrote on Thursday, the results of the 2017 U.S. one-off elections triggered some uncertainty about the tax reform prospects. The investors’ hopes were further reduced yesterday, as the U.S. Senate tax-cut bill was unveiled. As the proposal differs from the version of the House of Representatives, it may complicate Republican efforts to reform the U.S. tax code. We outline the main two differences between these two versions.

First, the Senate tax plan imposes a one-year delay on lowering the corporate tax rate from 35 to 20 percent, while the House bill cuts it immediately. It goes without saying that investors were disappointed that the entry of the U.S. tax bill into force may be delayed until 2019.

Second, the Senate plan would repeal the state and local tax deduction entirely, while the House bill would keep the deduction for property taxes. The Senate tries to offset revenue losses from the tax cuts, but its version may upset many voters.

Other key differences concern home mortgage interest deductions, the number of tax brackets, estate taxes, taxes paid by pass-through businesses, or popular tax credits and deductions (see the Hill’s article, which provides a nice summary of major dissimilarities). It seems that most of the problems would be eliminated by introducing low flat taxes without deductions, but this is not going to happen.

And what is going to happen? Well, the price of gold increased amid uncertainty over U.S. tax reforms, and was on track for its first weekly rise in a month. With the Fed hike in December already baked into the price of gold, the yellow metal may shine now, at least for a while, unless hope in Trump’s economic agenda or a more hawkish Fed is restored. Gold struggled both at the end of 2015 and 2016, but history does not have to repeat itself.