All eyes will be on Washington D.C. this week, as the Trump administration gets ready to have a major piece of tax legislation passed. The highly touted tax reform bill would cut tax rates and lower the corporate tax rate from 35 percent to 21 percent. A major decrease in the rate paid by corporations could potentially spur further economic growth and investment, and investors appear to be confident at this point that the proposed legislation will become law.
The increasing optimism over the economy has been reflected in higher stock prices and ongoing willingness on the part of investors to add to long equity positions despite the aging bull market. The market does not seem to have reached a level of exuberance yet, however, that could be indicative of a top. Although numerous analysts have made calls for the market being at or near its highs for this bull market, stocks have been very resilient and so far have not shown any significant signs of reversing course. Other analysts have taken the other side of the trade, calling for stocks to continue moving higher-even substantially higher-from current levels.
Whatever the case may be, the path of least resistance in stocks remains higher until proven otherwise. Should equities continue their seemingly endless march higher, gold and other perceived safe haven asset classes may have a difficult time gaining any real traction. That being said, gold investors appear quite content scooping up the metal on any significant dips. In addition, while the market did see a bit of a washout recently, that selling did not do any significant chart damage. On the contrary, that sell-off could possibly indicate a bottom has been reached.
Although gold has a number of bullish, long-term factors working in its favor, it is also contending with a number of short-term influences that have kept a lid on prices. Higher stocks, strong risk appetite and the notion of higher rates have all weighed on the metal in the short-term. Long-term investors appear quite content buying fold in its current range, however, and the lack of any significant moves lower would seemingly indicate a strong degree of market equilibrium.
Whether it’s today, next week, next month or next year, that equilibrium will change at some point. And when it does the case is very strong for substantially higher prices. Any number of issues could act as the catalyst for a major upside breakout, including a stock market crash or reversal, ongoing dollar weakness, a cryptocurrency crash, recession or geopolitical factors. The fact is that this is a great example of where the patient, long-term investor could be handsomely rewarded.
In the near-term, gold will likely take its cues from stocks, the Fed and any fresh geopolitical news. As the holidays approach, trading volumes will likely decrease significantly, which can also fuel a high degree of market volatility. In addition, year-end selling or position squaring may also be a factor for markets in the weeks ahead going into the New Year.