Gold prices rallied to their highest level since December 6 on Tuesday before the House vote on the tax reform bill drove the market lower into the close. Despite the setback, gold prices remain firm due to a struggling U.S. Dollar and a short-term setback in U.S. equities.
On Tuesday, February Comex Gold settled at $1264.20, down $1.30 or -0.10%.
Gold is being primarily supported lately by the weakness in the U.S. Dollar. At this time, the dollar is being pressured by concerns over the impact of the U.S. tax overhaul on economic growth. Investors are taking the view that major tax reform would unlikely boost the economy enough to significantly influence growth or inflation and the U.S. Federal Reserve’s future interest rate decisions.
Although stock market investors have recently expressed a positive outlook for tax reform by driving the major indexes to record highs, Fed policymakers only expect the U.S. economy to get a short-term boost from the tax reform. After the initial lift, they project growth will ease back to about 2 percent by 2020 and not rise to around 3 percent as Trump and has administration predict.
In other news, although investors were primarily focused on tax reform, there were three important U.S. economic reports on Tuesday. The major report was Building Permits. They came in at 1.30 million units, down from the previous 1.32 million units, but better than the 1.27 million units.
The U.S. Current Account also improved to -101 billion, better than the -116 billion estimate and the previous -124 billion.
Housing Starts jumped 1.30 million units, up from a downwardly revised 1.26 million units. Traders were looking for a 1.25 million unit increase.
Forecast
A slight delay in the vote on tax reform may be giving gold a boost early Wednesday. At 0850 GMT, February Comex Gold futures are trading $1267.40, up $3.20 or +0.25%.
Early Wednesday morning, Senate Republicans passed a bill calling for the overhaul of the American tax system, sending the plan back to the House of Representatives after Senate rules forced them to make last-minute changes.
According to CNBC, three provisions in the bill adopted by the House on Tuesday did not comply with Byrd rule requirements. The rule governs what types of provisions the Senate may consider under the procedural budget window known as reconciliation.
With the Senate approving the bill by a 51-48 vote, it now gets sent back to the House of Representatives for final approval then sent back to the President to be signed into law. Republicans are hoping all of this will take place before the end of the week.
The thin pre-holiday volume is increasing the chances of a two-sided trade in gold. Rather than try to predict the impact of tax reform on gold prices, it’s probably best to react to the price action in the U.S. Dollar, U.S. Treasury yields and U.S. equity markets. Gold is likely to be underpinned if all three factors remain under pressure.
Later today, investors will get the opportunity to react to the latest data on U.S. Existing Home Sales. However, we’re not expecting much of a reaction to this news.