Biden's $3.9 Trillion In Spending Plans Stoke Inflation

Summary

• Gold and silver markets sprung higher on Thursday as April and second quarter trading kicked off.
• The ongoing threat of inflation - and actual inflation - will lead to more buying of gold, silver, and other hard assets.
• The market has already been buoyed by ultra-low interest rates, quantitative easing, and the threat of rising price pressures.
• And even if the Fed ultimately hikes rates, if history is any guide, central bankers will be behind the curve - and gold and silver will benefit from real interest rates that continue to remain in negative territory.

By Mike Gleason

Welcome to this week's Market Wrap Podcast, I'm Mike Gleason.

Gold and silver markets sprung higher on Thursday as April and second quarter trading kicked off. After suffering losses in the first quarter, precious metals may now be due for a spring rally.

Despite gaining ground yesterday, gold finished the holiday-shortened trading week down fractionally overall at $1,738 an ounce. Silver, meanwhile, gave up just 8 cents on the week to close at $25.16 per ounce.

Mining stocks outperformed, which is usually a bullish sign for the metals. Shares of major gold streaming company Franco-Nevada broke out to a 3-month high. Perhaps the mining stock indexes will soon follow suit, along with gold and silver prices.

Turning to platinum, the market gained 2.2% this week to trade at $1,228. And finally, palladium fell a slight 0.2% to come in at $2,714 an ounce.

The U.S. Dollar Index was up slightly this week. Regardless of how the dollar fares against other fiat currencies, investors can expect massive depreciation ahead in real terms. There is no end in sight to the inflationary cycle of spending, borrowing, and printing in Washington.

This week President Joe Biden promoted a so-called infrastructure package that comes in at more than $2 trillion.

Much of the proposed spending has nothing to do with paving roads, building bridges, or expanding ports. These sorts of transportation upgrades are slated to only get $115 billion. Meanwhile, Biden would spend $174 billion on electric vehicle subsidies and hundreds of billions more on various "green" and racial leveling programs.

The bulk of the proposed spending appears to be very much inspired by the World Economic Forum's Build Back Better agenda - also known as the Great Reset.

Of course, the Federal Reserve will be expected to play its part. Even though the Biden administration and Democrats in Congress are talking about raising revenues through tax hikes on corporations and investors, they will keep spending regardless of tax receipts. They will issue more debt, and the Fed will print more currency to cover it.

Although the news out of Washington is pretty grim these days from the standpoint of sound money, precious metals investors do have a few allies in the halls of Congress.

On Tuesday, Representative Alex Mooney re-introduced legislation that would remove all federal income taxation from gold and silver coins and bullion.

Mooney's Monetary Metals Tax Neutrality Act is backed by the Sound Money Defense League. It would clarify that the sale or exchange of precious metals bullion and coins are not to be included in capital gains, losses, or any other type of federal income calculation.

Acting unilaterally, Internal Revenue Service bureaucrats have placed gold and silver in the same "collectibles" category as artwork, Beanie Babies, and baseball cards. This classification subjects the monetary metals to a discriminatory long-term capital gains tax rate of 28%.

Sound money activists have long pointed out it is inappropriate to apply any federal income tax, regardless of the rate, against the only kind of money named in the U.S. Constitution.

Furthermore, the U.S. Mint continuously mints coins of gold, silver, platinum, and palladium and gives each of these coins a legal tender value denominated in U.S. dollars. This formal status as U.S. money further underscores the peculiarity of the IRS's tax treatment.

Under current IRS policy, a taxpayer who sells his precious metals may end up with a capital "gain" in terms of Federal Reserve Notes and must pay federal income taxes on this "gain."

But the capital "gain" is not necessarily a real gain. It is often a nominal gain that simply results from the inflation created by the Federal Reserve and the attendant decline in the Federal Reserve Note dollar's purchasing power.

The Monetary Metals Tax Neutrality Act would protect precious metals holders from income taxes on nominal gains when they sell.

Unfortunately, the current leadership in Congress is more interested in bills that would extract additional revenue from taxpayers. House Speaker Nancy Pelosi is unlikely to take up any sound money legislation.

But other members of Congress can be persuaded to join the fight for fairer tax treatment of precious metals and help build longer-term political momentum.

The recent surge in demand for bullion reflects growing numbers of people across the country becoming precious metals investors. Mints remain backed up and supplies of popular products remain scarce amid the buying pressure.

We have also seen a huge increase in internet activism focused specifically on silver. The Wall Street Silver Reddit forum promotes physical silver buying through clever online memes and real-world campaigns aimed at squeezing the big institutional paper market short sellers.

The "silver squeeze" movement could translate not only into much higher silver prices but a much higher profile for sound money issues.

In the meantime, those concerned about their bullion holdings being taxed should remember that income taxes only apply upon sales. Long-term holders don't have to worry about filing annual tax paperwork like they do with interest-bearing bank accounts or bonds.

Physical precious metals can also be held within an Individual Retirement Account, providing tax sheltering on any transactions executed within the IRA.

It can be a great tool for protecting against the twin threats of inflation and taxation. And unlike with ETFs that track the paper market prices of metals and must be sold for cash, you can withdraw your bullion and take direct physical possession of it under normal IRA distribution rules.

In other developments, you may have noticed the financial narrative in recent weeks has increasingly included concerns about inflation. This inflationary scare comes at a time when the government is unleashing massive stimulus measures to bailout states, businesses, and consumers - all in the name of combatting the pandemic.

We've already seen a $1.9 trillion helicopter money drop this year, and the Biden administration appears just to be getting started.

The latest reading of government's CPI (Consumer Price Index) continues to suggest that inflation so far remains low. Even if we do experience high inflation, government officials continue to assure, it will be transitory. Despite these weak guarantees, financial establishment luminaries are starting to sound the alarm.

Even Former Treasury Secretary Lawrence Summers along with former IMF Chief Economist Olivier Blanchard recently voiced concerns over President Joe Biden's $1.9 trillion stimulus plan, suggesting that so much new largess on top of all last year's large stimulus packages could cause the economy to "overheat."

Inflation is a tax on savers, wage earners, and those without sound money or hard assets, so while the exact definition of "overheat" remains under debate, it seems clear that a sudden rise in price pressures could cause the Fed to lift rates rapidly, potentially causing job losses and other issues as the economy slows.

Such a scenario could lead to a period of higher inflation, or even 1970s-style stagflation.

Considering more than 25% of all U.S. Dollars ever printed have been printed in the last year, would anyone be surprised?

The ongoing threat of inflation - and actual inflation - will lead to more buying of gold, silver, and other hard assets. Especially since Fed chief Jerome Powell has said that the central bank would be happy to allow inflation to run hot for a while before taking any action.

This means that the central bankers will not hike interest rates or roll back bond purchases to slow things down. And when government-reported inflation rises well above 2%, while interest rates remain at lower levels, the resulting negative real interest rates will underpin gold prices.

The gold and silver markets may very well have entered a win/win scenario.

The market has already been buoyed by ultra-low interest rates, quantitative easing, and the threat of rising price pressures.

And even if the Fed ultimately hikes rates, if history is any guide, central bankers will be behind the curve - and gold and silver will benefit from real interest rates that continue to remain in negative territory.

That's why precious metals may well rise in price regardless of what the Fed does or does not do in the years ahead.

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Editor's Note: The summary bullets for this article were chosen by Seeking Alpha editors.