The stock market declined on Thursday as news hit the wires concerning Biden tax proposals. The Dow Jones Industrial Average declined by over 300 points, while the tech-heavy Nasdaq lost nearly 1% on the day.
The equity plunge on Thursday begs the question of how stock markets may react to a more aggressive tax policy by the new administration. Some analysts suggested, however, that if aggressive tax legislation had a chance at being passed, the market would have dived by thousands of points, not hundreds.
The threat of the tax man is likely to become an increasing focal point or markets in the months ahead. Although the idea of higher tax rates can seem daunting and is unliked by most, if not all citizens, the higher tax rates are likely to only affect a few of the wealthiest Americans and corporations. As far as markets are concerned, it is a case of not k knowing that may be far worse than the actual legislation that is eventually proposed. That not knowing could fuel market volatility and could end up driving buying in precious metals as investors seek out a perceived safe haven for their capital.
Thursday’s equity performance could very well be the tip of the iceberg when it comes to fear based selling. Markets have continued their ascent for some time now, with little standing in the way of higher stock prices. The threat of the tax man could be the primary catalyst to end the current equity bull market and fuel an about face in markets. If that proves to be the case, the gold and metals markets could stand to benefit significantly.
The gold market has been range bound for some time now and could be just waiting for the next major catalyst to fuel a breakout in either direction. The bulls have bought up any significant dips to the bottom of the trading range while the bears have thus far limited any sustainable upside. Things could be set to change, however, if the bulls are able to maintain trade above the $1800 level on a closing basis. That level could hold the key to higher gold, while the $1700 area below could set the stage for a fresh leg lower.
The metals have benefited from a weaker dollar, easy monetary policies and other factors in recent months. Given the current geopolitical and economic backdrop, it is difficult to imagine a scenario in which gold does not continue its ascent to the upside. These factors, combined with rising inflation and the threat of an equity market reversal, should be enough to drive gold back to all-time highs or beyond. Good things often take time, however, and the recent sideways action in gold could be indicative of a brewing breakout that may come at any point.
A stock market reversal or collapse could be the final straw for the gold bulls. Such rice action could pave the way for sharply higher gold and could set the stage for fresh all-time highs to be made in the weeks or months ahead.