When lawmakers return from their August recess, they will have to deal with the debt ceiling and the tax reform. What does it mean for the gold market?
We are in the middle of summer and the lawmakers are on their holidays. So nothing should disturb our peace of mind now. Nothing except the vision of nuclear holocaust after the World War III triggered by the US fire and fury against the North Korea, of course. However, when the recess ends, the lawmakers will have to tackle with the debt ceiling which is currently $19.8 trillion. In May, a government shutdown was avoided, because Congress passed a bill providing funds through September. So the problem was actually merely postponed and the Treasury is expected to run out of cash in early or mid-October.
Hence, the worries about the failure to raise the government’s debt ceiling may start to weigh on the US dollar and support the yellow metal in the upcoming weeks. Surely, the US experienced several “debt ceiling crises” and each time Congress eventually raised the limit, avoiding the worst. Thus, the potential impact on gold should be limited and short-term. However, given the divisions among the Republicans and Trump’s unpredictability, there is some probability of the negative scenario.
The tax reform will be another hot issue after the recess, as after the failure of the healthcare reform, Trump and his fellow Republicans are pushing to get the corporate income tax rate down from 35 percent to 15-20 percent. Although we like the idea of tax cuts, it is easier said than done, as the cut would cost about $2 trillion over a decade, so it would be hard to offset, especially without the changes in the healthcare and without a border adjustment tax. Hence, when investors realize that corporate tax cut may not be implemented soon, they may revise their US economic outlook downwardly and purchase some gold.
However, the worries about both the tax reform and the debt ceiling may add some pressure to the US dollar, which should be supportive for the yellow metal. Stay tuned!
Disclaimer: Please note that the aim of the above analysis is to discuss the likely long-term impact of the featured phenomenon on the price of gold and this analysis does not indicate (nor does it aim to do so) whether gold is likely to move higher or lower in the short- or medium term. In order to determine the latter, many additional factors need to be considered (i.e. sentiment, chart patterns, cycles, indicators, ratios, self-similar patterns and more) and we are taking them into account (and discussing the short- and medium-term outlook) in our trading alerts.