It may be too soon to tell if the Biden years will prove to be a boon to precious metals. That said, it appears much of what the president is planning for the nation in the way of economic priorities are just the sorts of initiatives that could prompt many savers to take a long hard look at perceived safe-haven assets such as gold and silver.
For starters, you’re no doubt familiar with the ambitious spending plans of the Biden administration. The $1.9 trillion pandemic-relief American Rescue Plan already is law and expected to drive the federal deficit to a new all-time high this year – and it’s not even part of the White House’s official spending agenda. President Biden recently announced his 2022 fiscal year budget to the nation, and it certainly is an eye-opener – a comprehensive, wide-ranging spending package with a mind-boggling $6 trillion price tag.
In the weeks ahead, I’m going to have more to say about the president’s spending plans and the potentially significant implications for gold and silver. But there’s a specific feature of the Biden agenda on which I want to focus here: A proposed increase – of enormous proportions – in the capital gains tax. The president has proposed the single-largest capital gains tax increase in modern U.S. history. Specifically, the capital gains tax rate essentially would double for those earning more than $1 million per year, jumping from 20% to 39.6%. And if you factor in the 3.8% Medicare surtax on high earners’ investment income that’s been in place since 2013, it means the combined long-term capital gains rate on those $1 million-plus earners will hit a jaw-dropping 43.4%.
Historically, the impact of capital gains tax increases on financial markets has been less consequential. But in terms of magnitude from the existing rate – nearly 100% higher – this proposed increase is unlike those that have come before. It is for that reason why some experts worry markets could be in store for not only a sizable hit but a steady, prolonged headwind if a capital gains increase of the size proposed indeed becomes a reality.
As bad as this possible increase could be for markets, however, it potentially could provide additional energy for precious metals that have been thriving amid optimal monetary and spending regimes. If markets indeed shrink from the tax’s imposing profile, gold and silver could strengthen in two specific ways: As uncorrelated risk-off assets that often appreciate in the face of suffering markets as well as assets possibly viewed as more competitive in their own right compared to feeble interest-bearing options and equities that could tank if a sharp capital gains increase trips up markets.
Analyst: Tax Hike Could Boost Metals Because “Money Goes Where It Is Treated Best”
As I mentioned a minute ago, some see precious metals potentially benefitting from a possible markets-adverse capital gains tax increase merely on the basis that gold and silver often climb as financial markets fall. One of those who suspects that might happen in the event the president’s proposed capital gains tax increase becomes a reality is Sean Lusk, vice president at Walsh Trading, a Chicago commodities brokerage.
Lusk’s pro-metals narrative in this case is simple and direct: Gold and silver could appreciate on the strength of their perceived safe-haven appeal if markets sink. “Changes in tax policy could create a drawdown, where major stock indexes go negative for the year,” Lusk told Kitco News. “If that should occur, we should get a bid on gold.”
But there’s more to metals’ potential jump in response to a massive capital gains tax increase than its capacity to thrive as a potential safe haven. If markets turn sour on a capital gains hike, it necessarily means equities – which continue to remain productive – would also turn sour. If that happens, savers would have even less to choose from in terms of fertile asset options.
I’ll explain further….
The ongoing ultra-low-rate environment generally has prompted stronger interest in precious metals as perceived safe-haven assets on the part of savers concerned that central bank low-rate initiatives would significantly weaken the dollar. But chronically low rates also have benefitted precious metals by greatly mitigating the opportunity cost of owning metals. Physical gold and silver don’t pay interest and that sometimes can harm interest in metals under more historically normal rate conditions. But that’s not seen as a disadvantage by savers in environments when interest-bearing vehicles – such as certificates of deposit and bonds – pay so little that real rates are actually negative when one accounts for inflation.
So record low rates maintained for an extended period energize interest in metals as potential safe havens, and further energize that interest because enthusiasm for interest-bearing assets is greatly reduced. Now there’s serious talk of doubling the capital gains tax on America’s biggest earners. If that comes to pass – and even if it merely looks as though it will come to pass – the wind could disappear from the sails of equities. Ultimately, then, persistently low rates and a possible mammoth increase in the capital gains tax could make interest-bearing assets and equities less interesting to savers. Combine that with the separate energy that tends to naturally accumulate to metals on the basis of low rates, big spending and – now – inflationary signs, and it’s possible the broad public interest in gold and silver could climb even higher.
The Kitco News article referenced earlier features a simple but telling assessment by Kevin Grady of Phoenix Futures and Options LLC of the potential for an even more improved metals climate if a capital gains tax increase ultimately levels markets. “Money goes where it is treated best,” Grady said. “Right now, people are chasing yields. They want to find the higher yield.”
In other words, if gold and silver see organic strength on the back of low rates, profligate spending and a spike in inflation…and also see additional strength by virtue of the fact low rates and rocky financial markets are blunting interest in bonds, CDs and equities…then it’s difficult to imagine how the environment for precious metals could become any more ideal.
Metals Resume Surge After Slow 2021 Start
Amid the broadly positive metals climate, gold and silver experienced a slow start to 2021, trending slightly downward from January through April. May, however, was a different story as recent good news for gold and silver in the form of a Fed recommitment to low rates, expectations of bigger Biden spending, signs inflation could be returning and the possibility America’s biggest earners could see their capital gains tax rate double seems to have reenergized the metals. Last month, gold climbed nearly 8% while silver rose roughly 8.5%. More broadly, over the last 2 ½ years, gold has appreciated 56% and silver has climbed 96%.
We can’t know for sure where precious metals will go next. But there seems a distinct possibility the overall environment for gold and silver will improve additionally from here. And part of that improvement could well come in the form of an onerous increase in the capital gains tax rate that troubles financial markets and, in turn, further ignites both metals’ perceived safe-haven property as well as its potential as a growth asset.