U.S. Treasury Secretary Steven Mnuchin dropped a bombshell on investors on Monday.
The much-anticipated August delivery date for tax reform is not going to happen.
Gold reacted as you might expect: it hit the highest levels we’ve seen in months. In Monday’s Financial Times, Mnuchin said that plans for tax reform by August were “highly aggressive [and] not realistic at this point.” He also remarked that “it is fair to say that it is probably delayed.”
For stock market investors who’ve bid up company shares to record levels this year, this news comes like a punch to the gut.
Much of the price appreciation that has driven P/E ratios on the S&P500 beyond sky-high levels has been the result of wishful expectations. Everyone has bet the farm that tax reform would deliver a huge windfall to corporate America, on time and as promised.
Hopefully it will come. But no one can yet say when or how much.
Imagine the boost to corporate profits if taxes really dropped from 35% to 15%, alongside a personal tax cut that would boost personal spending. This was a central promise of the current administration during the election cycle. However, this lofty expectation has already been fully priced into the markets, and then some, for at least most of 2017.
So, even if the administration pulls off tax reform in 2017, there is little or no upside left in the stock market — even with a near-perfect result. Realistically, odds are way greater that further disappointments or delays will send the market down.
With the August deadline bubble now burst, investors could be easily spooked out of the market. Especially with the string of recent lame economic indicator announcements we’ve gotten.
OVERSEAS SCARES
Gold prices have also been driven higher in response to troubling sabre-rattling around the globe. Tensions are clearly rising between the U.S. and Russia and North Korea. North Korea made a failed missile test launch this past weekend and President Trump has taken a tough rhetorical line with Pyongyang.
Jeffrey Halley, a senior analyst at OANDA, states that gold could be heading to $1300/oz and beyond. He expects any dips in prices to be eagerly sought by traders. FXTM chief market strategist Hussein Sayed believes that the uncertain combination of the upcoming elections in France, rising geopolitical tensions and doubts over President Trump’s ability to follow through with his campaign promises presents an ongoing threat to stock market stability. He thinks investors will gravitate to gold as a hedge.
Chad Morganlander, portfolio manager at Washington Crossing Advisors, believes that gold will likely gain 4 to 5 percent in the next six months. ICBC standard strategist Tom Kendall also believes that conditions are very favorable for bullion. He thinks the absence of effective political leadership and/or direction will play strongly in favor of gold.
GLOBAL DEMAND FOR PHYSICAL GOLD IS GROWING
According to Bloomberg, demand for gold is rising, as evidenced by England’s Royal Mint. Due to higher geopolitical tensions, sales increased 20% during the first three months of 2017. Chris Howard, director of bullion for The Royal Mint, says sales have been strong across all markets, especially from Germany and the U.K.
A recent World Gold Council study reaffirms the important role that Europe plays as a significant source of investor demand for gold. Solid European demand has helped add momentum to gold’s rally since the start of the year. Juan Carols Artigas, director of investment research at the WGC, notes that the latest data continues to support the view that Europe’s growing demand will be a long-term sustainable trend.
European gold demand began to grow in 2016 ahead of the Brexit vote, and the growing popularity of nationalistic parties in Germany and France has fueled demand for gold. Artigas thinks that gold will remain an attractive investment in Europe because European bond yields are so low.
The WGC also expects a revival in demand for gold in India in 2017. The organization expects that India’s current policies will deliver a stronger and more transparent economy and that in turn will support gold demand.
Shekhar Bhandari, senior executive vice-president of Kotak International Banking, says that the Indian demand for gold continues to be good on account of festivities as well as the marriage season. The Hindu festival of Akshaya Tritiya, which falls on April 28, is considered auspicious for gold buying. Gold is intimately ingrained in Indian society and shows every sign of increasing in the years ahead.
Rhona O’Connell, GFMS research analyst, says the fundamental reason why people own gold hasn’t changed in 50 years: it remains the only non-fiat currency, is a store of value and offers a form of safe-haven protection against risk. O’Connell also points to the long-tem trend of higher gold sales in the Far East, while noting that the Western world has not lost its appetite for gold either.
TIME TO GET PREPARED BEFORE THE MARKET SHIFTS
Fears of a major world crisis have risen. The president’s ambitious agenda is stalled and hyper-partisanship undermines any hope that Washington, D.C. will end its dysfunction soon. A new Cold War has erupted between the U.S. and Russia, and North Korea is making progress in creating a ballistic missile capable of hitting the continental U.S.
All of these undercurrents of fear and tension as well as robust demand in Europe and India have caused gold prices to rise.
