The 2016 US presidential election is turning into a bizarre show with both candidates hurling dirt at each other. Starbucks CEO Howard Schultz had presaged at the start of the year that the U.S. presidential election will likely turn into a ‘circus’. And the present reality is certainly not far from his prediction.
However, here we will not analyze Presidential candidates, but find out how the price of gold will react ‘if’ Donald Trump is elected the head of the biggest economy in the world – USA.
In order to understand how a Trump win would affect gold prices we have to first critically look at economic plans that have been unveiled by the presidential nominee in the past few months. Most will agree that Trump had done a great job in acquiring wealth – his present wealth is expected to be between $4.5 to $10 billion. So, can he make America increase its wealth as well?
Details of Trump’s Economic Plan
Trump has been a riveting figure in this election enthralling both local and global audiences. When it comes to his economic views, they certainly seem to be revolutionary, having worldwide implications, such as repeal of Obamacare, stop hedging funds from exploiting tax benefits, renegotiation and even retract from NAFTA, major modification in tax code, and enacting tariffs of up to 35% to protect local industries.
In addition, Trump has stated that he wants to keep deficit in check, focus on economic growth, and prevent influx of illegal immigrants in the country.
If the Republican presidential elect implements his economic plans and take extreme measures on international trade agreements, the winners will be energy drillers, gold miners, construction firms, defense contractors, food producers, and regional financial companies. On the losing side will be large banks, hotels, and also industrialists and retail chains that import goods for further processing or selling.
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In a speech addressed to crowds at Detroit Economic Club, Trump revealed some details about his economic plans that we had discussed above. About the proposed changes in the tax plan, the presidential nominee of the Grand Old Party had stated that there will be a deduction in the child care expenses and the corporate taxes would be drastically cut from the current 35% to 15%.
Also, Trump had proposed that the current seven personal income brackets would be cut to just three: 12, 25, and 33%. Earlier the tax limit was proposed at 25% which economic pundits had said will have great economic consequences if implemented, with positive impact on gold prices.
Donald Trump has hinted that if he win office big banks would be a short bet as he will reinstate Glass-Steagall Act
Also known as the Banking Act of 1933, it was put in place during the Great Depression to separate security activities from commercial banking. The act was repealed on the pressure of banks in 1999 when the Congress passed Gramm-Leach-Billey Act.
If the Glass-Steagall Act is reinstated again, banks will be forced to limit their security investment operations. This may well result in a decline in the stocks and bonds market, thereby helping gold to appreciate in value
Meanwhile, Trump had stated that he will leave the Social Security and Medicare untouched that are the costliest entitlement plan of the federal budget. Experts say that if the tax cuts are not substantiated with a comprehensive plan to increase the government revenues, it will greatly widen the deficits without providing meaningful benefits to the overall economy.
How Trump’s Economic Plan Will Affect Precious Metal Prices
Trump’s tax structure favor the rich and the growing middle income class of freelancers and self employed, but it will drastically reduce public revenues. It would reduce tax revenues by about $11.98 trillion over the next decade even when accounting for increase in GDP and supply of capital and labor.
The cut in taxation would dramatically increase budget debt and deficit which would likely reduce the Feds ability to inject money in order to prop up the economy.
Due to the widening budget deficit, it is expected that the creditors will start to demand a higher rates on government bonds due to which the market would be spooked. Moreover, it will keep global investors from relocating or investing in a country that is deliberately going over the fiscal cliff.
Spiraling budget deficit will mean that the feds will have to borrow more and pay greater interest on the loans. This will have a negative effect on not only the economy of the US but also the rest of the developed world that is inextricably linked with the US economy. This will make investors turn to precious metals that will buoy up its prices in the international market.
Conclusion
At the moment the US presidential election drama is still in its preliminary stages with both the GOP and Democratic nominees equally likely to win the election. Here we had analyzed what would happen to the economy and gold prices in the event Trump ascends to the throne and becomes the 44th President of the US.
By analyzing Trump’s economic agenda, it is now clear that gold prices are likely to appreciate remarkably in case of a GOP win. The taxation plan would drastically reduce revenues of the country, while the reinstatement of the Glass-Stegall Act will likely result in subdued stock and bond investment activities.
What is considered a bane for the traditional market is a boon for gold and other alternative investment instruments. So, in the event Trump wins the election investor that invests in gold and precious metals will likely be treated to a handsome return on investment.
For the moment though, all we can do is sit and watch the drama of the presidential election unfold and see who becomes the next president of the US.
