Will Biden's tax increase be good for gold? It also depends on the face of the Federal Reserve.

Biden raises taxes or benefits gold

It is reported that US President Joe Biden's next spending bill will consider a massive tax increase, which will be the first large-scale tax increase since 1993. Analysts say that while the bill is still under discussion, a tax increase could be good for gold, depending entirely on the Fed's reaction.

It came as no surprise to the market that Biden wanted to cover spending by raising taxes. More details of the plan will be revealed this week.

According to foreign media reports, people familiar with the matter said the tax increase is part of Biden's long-term economic plan and will be a follow-up to the $1.9 trillion epidemic relief bill. This will fund government spending on infrastructure, climate change, and so on.

At present, the proposal includes raising corporate tax from 21% to 28%, raising personal income tax for people earning more than $400000 a year, expanding the coverage of inheritance tax, and raising capital gains tax for those earning more than $1 million a year.

Although the bill has yet to be discussed in the future, it will have a significant impact on the market. In theory, any increase in corporate tax will mean a reduction in corporate revenue.

"shares rose almost immediately after Trump launched a $1,000bn stimulus package in the form of lower corporate and personal income tax," said Bart Merek (Bart Melek), head of global strategy at TD Securities. But now it is entirely possible to think the other way around that raising corporate taxes will be more or less a drag on the fiscal position. On the one hand, spending has increased, but on the other hand, the government has taken money out of the economy. "

The reason Biden wants to raise taxes is influenced by the theory of propensity to consume. "basically, what Biden does is take money from high-income people, that is, people earning more than 400000 a year, and distribute it to low-income people," Merlek said. "

The logic behind this is that low-income families will have a higher propensity to spend, which means that the vast majority of them will spend money, which will be spent directly.

In the long run, this will eventually drag down business investment and affect production and supply. At the same time, rising consumption rates can also lead to inflation.

"A higher capital tax on companies means less capital, slower productivity gains and less ability to create wealth," Merlek said. Redistribution means stimulating consumption a lot, so production will decrease and consumption will increase. "

Edward Moya (Edward Moya), senior market analyst at Anda (OANDA), said that in this case, the stock market will not rise as much as before, but this is good for gold because of the negative correlation between the two.

Mr Moya added: "people expect the US economy to be overheated, which could raise concerns about 'tapering panic', leading people to re-engage in safe-haven trading and thus bullish on gold. Investors are expected to push gold higher. "

Kevin Grady (Kevin Grady), president of Phoenix Futures and options Company (Phoenix Futures and Options LLC), said: "an increase in capital gains tax is bound to hurt the stock market. Money is spent in the best place. Now, people are chasing profits. They want higher returns. "

Sean Rask (Sean Lusk), co-director of (Walsh Trading) at Walsh Trading, said it was widely believed that the tax increase would trigger a run on stocks, which in turn would trigger a run on cryptocurrencies.

"A change in tax policy could lead to a fall in the stock market, which will result in negative growth for the whole year," Rask said. If this happens, we should buy gold. The biggest concern now is what impact the tax increase will have on the dollar and Treasury yields. If the Fed decides to raise interest rates, it will be a setback for gold. "

The possible impact of the increase in Biden tax on gold is mainly reflected in two aspects: on the one hand, the increase in capital gains tax may hit the stock market, resulting in part of the stock market money flowing into the gold market to avoid risk; On the other hand, the tax increase made up for the gap in Biden's infrastructure plan, eliminating the need for the federal government to borrow heavily and reducing the size of Treasury bond sales, which could keep Treasury yields relatively low. this is also good for gold.

The attitude of the Federal Reserve is crucial.

The Fed's response is crucial to the future performance of gold prices, especially if inflation rises.

If the Fed keeps loose, gold will do well. But if the Fed decides to raise interest rates early, gold prices could suffer again.

"the Fed may continue to ease and keep interest rates artificially low," Merlek said. While fiscal spending continues, inflation rises slightly and real interest rates will end up very low. If the Fed wants full employment, it will keep interest rates low. If it targets inflation, then gold will perform poorly. "

Moya said it is important to keep in mind that it will take several months for the US government to pass the bill. The proposed tax increase will change a lot after discussion.

He added: "Biden knows that his massive tax increase plan will not have bipartisan support in the coming months. The bill is still in the early stages of discussion, it is not yet the final version, and there will be countless changes after that, for which we must be prepared. "

In addition, Caroline Bain (Caroline Bain), a capital economist, says the government may not be interested in introducing another deficit financing bill. So it is hard to pass a plan to subsidize spending on infrastructure bills by raising taxes.

"our US brokerage team is sceptical about whether there will be another major stimulus package and currently sees it only as an upside risk to economic growth," Bain said. No Republican will vote for the tax increase, and the attitude of centrist Democrats is unknown. In terms of economic impact, any stimulus will last for years, and if tax increases are used to cover spending, the initial impact may even amount to fiscal tightening. "

Rask added that the market would not react to the news of the tax increase before the vote. By the time the vote is taken, the bill may have been amended many times. "how much more money will the Fed print after the $1.9 trillion stimulus package?" he said. If the government passes this $2 trillion to $3 trillion infrastructure bill, it will be good for gold and bad for the dollar. "