Proposed Record Capital Gains Hike: More Good News for Gold and Silver?

I think it’s safe to assume President Biden has not devised his policy agenda on the basis of how precious metals might fare most favorably. That said, as we move deeper into the new president’s tenure, it’s becoming increasingly difficult to ignore the reality that the fiscal measures he’s hoping to apply on behalf of that agenda potentially could result in a solid strengthening of gold and silver through the foreseeable future.

It’s no secret the president plans to do a lot of spending over the next four years. You already know about the $1.9 trillion American Rescue Plan pandemic relief bill that became law in March. What you may not know, however, is none of that money counts toward Biden’s official spending agenda. It may be “extra” money, of a sort….but don’t confuse that with “found” money.

The government printing presses have been fired up to pay for the cost of the American Rescue Plan. And as it turns out, the impact of the American Rescue Plan on the federal deficit is projected to be so substantial that estimates say the 2021 deficit will be the biggest on record at $3.4 trillion. 

So that’s a $3.4 trillion deficit this year…and we haven’t even begun to account for the president’s actual budget for the 2022 fiscal year. President Biden did announce his proposed 2022 budget just as the Memorial Day weekend was getting underway.

It’s a sweeping $6 trillion spending package with profound implications for the deficit and debt 10 years from now. Indeed, if the president receives everything he’s looking for in his budget, the impact on the socioeconomic fabric of the nation could be both substantial and permanent.

I plan to say more about President Biden’s budget in the near future. But there’s a specific component of his economic agenda revealed in recent weeks on which I want to focus right now. I’m referring to a proposed, massive increase in the capital gains sales tax that would apply to America’s biggest earners. This proposed increase is in fact so big we’ve never seen anything like it before in modern U.S. history.

The president expects to rely on deficit spending to pay for a good deal of his agenda. But he also is planning to cover much of it through tax hikes. These tax hikes include a near-doubling of the capital gains tax – from 20% to 39.6% – on those taxpayers earning more than $1 million per year. When you add to that the 3.8% Medicare surtax that high earners have had to pay on investment income since 2013, it means taxpayers earning more than $1 million annually will face a total combined long-term capital gains tax rate of 43.4%.

Data shows that capital gains tax increases have not exerted a great deal of impact on markets, historically. That sounds like good news for owners of equities. But I’m not so sure that’s going to be the case this time around. We’ve not seen – in terms of percentage increase over the existing rate – a single jump anywhere near this big before. That’s why there’s concern in some corners that such an onerous hike on those folks who likely own a large number of equities could not only result in a substantial initial hit to markets but also create an ongoing drag on markets in the form of a disincentive to purchase equities.

But what’s bad for markets sometimes is good for gold and silver precious metals, and that potentially could be the case here. There are, in fact, two ways gold and silver potentially could thrive as a direct result of a massive capital gains tax increase. One way is by virtue of metals’ tendency to often strengthen as an uncorrelated risk-off asset when markets sink. Another way is by standing out as a bona fide growth-asset option in comparison to anemic interest-bearing vehicles as well as equities that could suddenly lose steam if markets are stung by a big capital gains tax jump.

Analyst: Tax Hike Fallout Could Energize Precious Metals Because “Money Goes Where It Is Treated Best” 

As I alluded to a few moments ago, precious metals sometimes will strengthen merely on the basis of negative volatility striking financial markets. There are a variety of potential catalysts that can activate the safe-haven property many see gold and silver as having, and market turbulence can be one of those. And so as many see a proposed whopping increase in the capital gains tax adversely affecting equities markets, some experts also see precious metals thriving on that singular basis.

One of those experts is Sean Lusk, vice president at Chicago commodities brokerage Walsh Trading. There’s nothing particularly fancy or clever about the case Lusk makes for gold if the capital gains tax becomes reality – just a straightforward safe-haven argument. “Changes in tax policy could create a drawdown, where major stock indexes go negative for the year,” Lusk told Kitco News. “If that should occur, we should get a bid on gold.”

Simple enough. But if a tax increase harms financial markets in the current climate, it could be more than just metals’ safe-haven property that’s triggered. Their potential to perform as true growth assets could become relevant, as well.

So how might that work, you ask? Let me tell you.

It’s no secret interest rates have been at historic lows for a long time now and show no genuine signs of improving. One of the ramifications, of course, is that interest-bearing assets – such as bank certificates of deposit (CDs) and bonds – pay so little that savers who own them essentially end up with negative real rates when one accounts for inflation. Example: If someone owns a CD paying 1% per year and inflation is 2% annually, then the real rate that CD-owning saver is earning is -1% (nominal rate minus inflation rate).

You know that precious metals don’t pay interest…because rocks – even very valuable rocks – don’t possess the capacity to pay any such interest. That sometimes is seen as an opportunity cost which can hurt metals when interest-bearing assets ARE paying competitive rates. But gold and silver paying no interest becomes inconsequential when CDs and bonds end up generating negative real interest.

So as potential growth assets being fueled by such weak-dollar policies as record deficit spending and massive central bank asset purchases, precious metals can look more appealing to some savers in low-rate climates. But equities still are making progress, are they not? 

They are. But if a massive capital gains tax increase causes the wind to go out of the sails of financial markets, then equities may be seen as a less advantageous place to be in addition to interest-bearing vehicles. The net effect could be even more goodwill accruing to precious metals.

Kevin Grady of Phoenix Futures and Options LLC conveyed this possible effect in the same Kitco News article referenced earlier. “Money goes where it is treated best,” Grady said. “Right now, people are chasing yields. They want to find the higher yield.” Yes, they do. And if they haven’t been able to access better returns in interest-bearing assets…and equities become a problem in the near term thanks to a record jump in the capital gains tax…then gold and silver could benefit significantly. 

Biden Fiscal Proposals Appear to Be Reinvigorating Gold and Silver After Slow 2021 Start

Amid a broadly positive climate for an asset, it’s not unusual for there to be periods when that asset is “resting” for a bit, remaining flat or even moving downward some. Such was the case with gold and silver during the first four months of 2021. However, as signals have poured in this spring indicating just how positive a tax-and-spend/spend-and-tax Biden presidency potentially could be for the hard assets, gold and silver again have come to life. Since the beginning of May, gold has appreciated 7% and silver has jumped a little more than 8%. Over the last 2 ½ years, since the current bull march kicked off in earnest, gold and silver have risen 55% and 97%, respectively.

Of course, no one can know for sure where precious metals will go from here. That said, as the multitude of pro-metals signs continue to gather, the outlook for gold and silver remains robust, in my opinion. And among those pro-metals signs is the distinct possibility we’ll see a massive increase in the capital gains tax that potentially could send high-flying financial markets back to earth, perhaps energizing metals’ perceived safe-haven and growth properties. Given this prospect, then, astute retirement savers would do well in my view to at least keep gold and silver on their radar screens for the time being.