Gold bulls are laughing.
The yellow metal surged about $30 per ounce over the past week, trading at US$1,256.80 at time of writing.
The rally’s strength has surprised. Yet, as I cautioned last week, there was formidable resistance around the US$1,245 per ounce zone. That held back the yellow metal last week, as it spent most of its time hovering around that level.
The breakthrough happened late Friday (US time). President Donald Trump failed to secure enough Republican votes to repeal and replace Obamacare, which weighed on the US dollar.
The greenback is now trading at seven-week lows.
Following the failed vote, the market is doubting Trump’s ability to push more ‘market-sensitive’ tax reforms through Congress. And with confidence in government taking a hit, gold is trading higher.
The tax that doesn’t keep on giving…
Fox News reported last week:
‘It is hard to overestimate the damage the Freedom Caucus has done to the fledgling presidency of Donald Trump, and to the country. By blocking the American Health Care Act (AHCA), the conservative group has guaranteed that Americans will struggle forward under the burden of Obamacare.
‘In the next few months, insurers will announce their premium hikes for the coming year. Chances are, given the continuing withdrawal of major companies from the marketplaces and the ongoing failure of the bill to attract enough young and healthy participants, the new rates will not be pretty.
‘Last year premiums went up 25%; it’s likely the increases will be higher this year.’
Unfortunately, the pharmaceutical and medical lobbyists won last week’s battle; not the people. The Affordable Care Act — Obamacare — is little more than a tax that lines the pockets of big corporations.
That shouldn’t be a surprise. Shares of US hospital companies and managed-care firms — especially those that focus on Medicaid — surged following the no vote. Investors in these stocks are cheering the fading prospects for major cutbacks to Medicaid, and subsidies that help low-income people buy individual plans.
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Investors in gold, and the best gold stocks, have had something to cheer about as well.
When one strips away the leftist posturing, the failure to repeal Obamacare has a specific monetary impact: approximately US$1 trillion. That’s concerning to the wider market, pushing the greenback lower and gold higher.
Long Room reported on Monday (my emphasis added):
‘Since the ObamaCare repeal bill would have eliminated most of the 2010 health law’s taxes, this would have lowered by a similar amount the revenue baseline for tax reform. Essentially, with the ObamaCare taxes gone, it would have been easier to pay for lowering tax rates. Now, if Republicans want to eliminate the ObamaCare taxes as part of tax reform and ensure the bill does not add to the deficit — which they need to do to assure Trump’s reform process continues under Reconciliation, avoiding the need for 60 votes in the Senate — they will have to raise almost $1 trillion in revenue.
‘In other words that — all else equal — is how much less tax cuts Trumps and the republicans will be able to pursue unless of course they somehow find a source of $1 trillion in tax revenue (or otherwise simply add to the budget deficit) to offset the Obamacare overhang.
‘Considering Paul Ryan’s statement on Friday, it appears that at least for the time being, Republicans would leave the ObamaCare taxes in place. “That just means the ObamaCare taxes stay with ObamaCare,” he said. “We’re going to go fix the rest of the tax code.”’
Indeed, Obamacare is little more than a massive tax…one Trump was hoping to eliminate on Friday. As you know, that didn’t quite work out. The failure to pass the healthcare bill now makes tax reform harder; although ‘it does not in any way make it impossible,’ US Speaker Paul Ryan said.
That’s not what the market thinks…
Larry Lindsey, a former economic adviser for George W. Bush, agrees. He summed up investors’ thoughts to CNBC’s Power Lunch following the vote. Lindsey said a replacement for Obamacare ‘was necessary for budgetary reasons, for tax reform, because it was a revenue gainer.’ Trump’s goals for economic growth should also be questioned now, he warned.
Taking a step back, I understand that career politicians and the mainstream media are out to attack Trump. But Lindsey does make a good point — not passing the healthcare bill has made Trump’s job that much harder.
Will he be able to get his other policies through Congress?
Who knows? But the market has its doubts. And that’s what matters…
Why gold could rise on more uncertainty
The Republican Party won’t find it easy to locate US$1 trillion in offsetting savings or revenues. Plus, don’t forget about the proposed border adjustment tax (BAT). BAT should generate roughly US$1.18 trillion in tax revenues. Should it be ‘dead on arrival’ at the vote next week, it could blow out the funding deficit by another US$1.2 trillion.
Doing the maths, the tax revenue ‘hole’ could be as large as US$2.2 trillion!
James Pethokoukis, a columnist at the American Enterprise Institute of Economic Policy, believes the failure to pass healthcare reform reduces the odds of passing BAT. His bottom line: investors ‘won’t get to see cuts to a 15 to 20% tax rate’ in corporate and marginal tax rates.
Pethokoukis believes the tax rate will be more like 30%. It stands at around 35% today.
That’s an advantage for gold investors.
The yellow metal fell with a stronger greenback following Trump’s election. But with his fiscal agenda starting to unravel on the back of an unsupportive Congress, the market is losing confidence. That’s why gold is moving higher.
I expect we’ll see it rise more until the market regains some confidence.
Editor, Markets & Money
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