Here’s historical evidence and a strong argument that tax cuts are good for gold…
Is Tax “Reform” Good for the US Dollar? How About Gold?
Let’s investigate what happened after the last 3 major tax reforms. Another “reform” is on deck.
I picked up this idea from Holger Zschaepitz, @Schuldensuehner, who made the following Tweet, posting a chart from Bloomberg.
Proposed US tax overhaul, 3rd major change to US tax code over past 40yrs, will drive the Dollar, but not the way you would expect. Index plummeted 16% in 1986 after Reagan’s reform. After George W. Bush cut taxes on dividends in 2003, the currency slid 15%. (via BBG) pic.twitter.com/hKcFrMCYaH
— Holger Zschaepitz (@Schuldensuehner) December 5, 2017
In the following chart, I add a key piece of legislation that someone inadvertently overlooked.
Tax Reform vs US Dollar 1986-Present
- October 22, 1986: Tax Reform Act of 1986
- June 7, 2001: Economic Growth and Tax Relief Reconciliation Act of 2001
- May 26, 2003: Jobs and Growth Tax Relief Reconciliation Act of 2003
- November 16, 2017: House and Senate pass tax “reform”. The bill heads for reconciliation to straighten out differences.
US Dollar Synopsis
- Following the 1986 legislation, the dollar fell about 22% over the next six years.
- Following the 2001 legislation and continuing with the 2003 legislation, the dollar fell about 37% over the next seven years.
The Senate version of the bill is likely to add over $1 trillion to the deficit, while not even cutting taxes beyond 2027.
A bill that adds so much to the deficit is not US dollar supportive, to say the least.
However, one cannot view these things in isolation. How the dollar reacts also depends on events in the Eurozone, China, and Japan, as well as Fed interest rate policy.
Global Currency Debasement
Global currency debasement is underway.
Things may be even crazier elsewhere, so a decline in the dollar is not guaranteed.
A Driver for Gold
Sooner or later, competitive currency debasement will matter.
Gold is likely to be the primary beneficiary.
I wish I could tell you when this matters in a major way.
Gold vs. Faith in Central Banks
Amazing Non-Reform Act of 2017
I have a suggestion for the name of the pending legislation: The Amazing Non-Reform Tax Act of 2017.
For further discussion of the “non-reform”, please consider Tax Bill Analysis: Spend Your Extra $100 Wisely.
Mike “Mish” Shedlock