Gold Price Reacts To Tax Plan News; Is This A Sign Of Things To Come?

Friday, February 10, 2017

gold bars

Anyone watching gold recently noted that it seemed to have remarkable strength, moving up to the $1,240/ounce range. However, just recently gold dipped again…and as of the writing this morning, it’s down to about $1,230. So what’s caused this dip, and how should that affect your gold forecast moving forward?

Confidence In The Stock Markets After Tax Plan Unveiled; Bad For Gold?

MarketWatch has a big headline this morning: “Stock market poised to build on Trump tax-inspired gains.” Because President Trump recently disclosed that he plans to move forward with his tax reduction and simplification plan, investors take it as good news. With more money to spend in the markets, you might expect higher prices.

But since there is no tax plan in place yet, the headline is all about investor confidence. If investors believe that a tax reduction is on the way, they might be more inclined to move more money into the markets even before the plan materializes or any action is taken.

The increase has given the Dow Jones Industrial Average a boost to over 20,200, which further gives the Dow room over the 20,000-point barrier that had taken so long to achieve.

But you might be asking: what does this have to do with the price of gold ?

Gold Price Moving Down After The Tax Plan Announcement; Correlation Or Causation?

Many people see gold as a hedge against the price of stocks. As stocks go up, gold goes down, and vice versa. At least that’s the conventional wisdom. The truth is much more complicated. Even so, it should raise gold investors’ eyebrows when you see headlines like “Gold Price Dives $20 after Trump Trails ‘Phenomenal’ Tax Plans.”

What’s important to note here is that gold did indeed see a dip yesterday afternoon after reaching $1,240 an ounce. But that doesn’t mean gold was exclusively reacting to the Trump tax plan news. There are a lot of different elements that can affect the price of gold.

But with a surge in the US dollar strength after the tax plan was announced, it’s not hard to see the mechanisms at work here. A stronger U.S. dollar buys more gold, which in turn means the price tends to be lower.

Turning Correlations Into Gold Price Forecasts

Understanding where gold is headed from here means acknowledging that market factors and investor confidence do play a role in the price. If that seems strange, consider how much more stocks at home and abroad are affected by confidence.

The more confident people are in the economy, the less likely they are to rush to gold in droves. But be wary of seeing a direct correlation. There may be occasional news, as we saw late this week, where the headlines seem to affect the price of gold. But as a long-term trend, you’d be surprised at the way in which gold moves. It can seem more random than the headlines would have you believe. 

Darren Capriotti

Darren Capriotti has been a market analyst for the past decade and is an expert in precious metals. He prides himself on his ability to analyze the market and offer true value to investors with questions about gold, silver, and other precious metals. Highly educated, incredibly passionate, and more accurate than most, Darren offers a true, unbiased look into what investors can expect in the precious metals market. You can reach Darren at dcapriotti@gold-eagle.com.