Note: The article was posted to GP Private investors in March 2021.
On March 31st, US President Joe Bidden proposed a new infrastructure plan. After the announcement of the corona relief plan, it’s the second big legislative plan. The plan aims at spending more than $2 trillion on jobs and infrastructure to lift the US economy. It’s an 8-year initiative requiring annual spending of 1% of GDP. This plan focuses on spending on energy, education, transportation, elderly and disabled care. Manufacturing, housing, tech development, hospitals cover a big part of this plan. Power, buildings, workplace, and water are also included in this plan.
An increase in the corporate taxes from 21% to 28% will pay for half of Biden’s infrastructure plan. This will annually generate additional revenue of about $1 trillion. Reports show that most businesses do not pay the full taxes after claiming deductions. Almost one-fifth of the 500 companies in America, including Amazon, take benefit from the loopholes to avoid taxes. To avoid loopholes, a global minimum tax rate will be established. In its response, Republicans presented an alternative infrastructure plan. It’s worth is approximately one-quarter of Biden’s plan.
Before we begin analyzing its implication for gold, let us see how it will impact the US economy. The government spending programs in the US are not very effective. Their actual cost is more than what was being estimated at the time of planning. So, the belief that government alone will be able to raise economic growth is wrong. Research shows that the private sector is more efficient than the government sector. So, this plan will weaken the efficiency and will also affect the economic growth in the long term.
Moreover, raising the taxes to pay the plan at this crucial time is not a good decision. Increased taxes will weaken the corporate sector in the US. This will negatively affect the US economy in the long run. Apart from that, raised taxes cannot fully finance the plan. It will increase the fiscal deficit, which will inflate the federal debt.
Will Biden’s Infrastructure plan rebuild gold? If yes, then how is this plan going to affect the gold market?
Higher government spending, corporate taxes, and debts will decrease economic growth. Essentially, this plan could be beneficial for the gold prices. The bold actions of Biden are being supported by the financial market. It is because the introduction of vaccines is strengthening the risk. It is also expected that this will allow the US economy to recover more quickly from the negative effects of the pandemic. All in all, it could increase the bond yield and support the US dollar.
Therefore, even though the Federal Reserve System will take action and relax its financial policy due to an increase in the interest rate, the bond yields will still move higher. These factors doesn’t mean that Gold will remain under pressure. We expect Gold to release its pressure due to many other reasons. By looking at the technical aspects of market, Gold has to find huge supports on yearly inflections and move much higher. Despite of the market conditions, Gold prices are expected to shoot much higher levels from here.
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