Tax Reform Is A Mixed Bag For Gold - BAML
(Kitco News)- As markets continue to digest the implications of Congress' historic tax reform, one bank sees it as a mixed back for gold.
In a recent note, analyst at Bank of America Merrill Lynch, said that they see gold under pressure in the first quarter of the year with the market bouncing back in the third quarter of 2018. The bank said that they see gold prices averaging $1,350 an ounce by the third quarter.
Before the new year, Congress managed to pass massive tax reform, the first overhaul of the tax system in more than 30 years. Some of the highlights of the legislation include a corporate tax rate fall to 21%, down from 35%; a repeal of the corporate alternative minimum tax; a near doubling of the standard deduction for individuals and restructuring of the way pass-through businesses are taxed.
The legislation also temporarily cuts taxes for all individual tax brackets.
However, the reduced tax income is expected to add $1.5 trillion to the national debt, which analyst at BAML see as positive for gold prices.
"This package will reduce the tax burden, so should pro-cyclically prolong the business cycle. To that point, our colleagues in the US economics team now expect stronger growth this year and next," the analysts said. "Gold often faces headwinds when growth is strong. Yet, the tax reform is not fully funded and the budget deficit is increasing. This suggests that the cost of providing a short-term stimulus is high."
The bank noted that optimism over potential growth from tax reform is expected to boost the U.S. dollar in the near-term, which will weigh on gold; however, that optimism is expected to fade by the third quarter.
"The tax reform is mixed bag for gold: a potential USD rally in 1Q18 may increase headwinds, but rising inflation, a higher budget deficit and linked to that, the risk of a sustained decline of the US currency medium-term are supportive. We therefore keep a 3Q18 average price forecast of $1,350/oz," the analysts said.
For the entire year, Bank of America sees gold price averaging $1,326 an ounce.
By Neils ChristensenFor Kitco News
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