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Markets Rallying on Hope, but Higher Taxes and Inflation Loom

Wage earners, savers, and poorly positioned investors to get hammered in 2021


Don't want to listen? Read the podcast below!

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

As investors anticipate a successful vaccine rollout and an economic rebound in 2021, bullish sentiment pushed some sectors of the stock market to new highs this week. But negative divergences are showing up, with momentum waning and volume thinning in the major averages.

For months, markets have rallied on hopes for a vaccine and more stimulus – even as the real economy is suffering under expanding virus restrictions and a stimulus deal that keeps getting thwarted by partisans in Washington.

Another threat markets seem to be overlooking – at least for now – is that of tax hikes under an incoming Joe Biden administration.

More on that in a moment. But first, let’s review this week’s price moves in metals markets.

Gold attempted a rally early in the week, but bulls ran into heavy selling pressure on Wednesday. As of this Friday recording, the monetary metal is up a slight 0.4% for the week to bring spot prices to $1,852 an ounce.

Silver is following a similar pattern and currently shows a small weekly loss of 0.5% to trade at $24.15 an ounce.

Turning to the PGMs, platinum is giving back some of its recent gains – down 3.6% this week to come in at $1,031. And palladium is off 0.5% since last Friday’s close to trade at $2,361 per ounce.

Elsewhere in the metals space, copper continues to be red hot. The bellwether industrial metal climbed for a sixth straight week to hit fresh new multi-year highs.

Copper’s relative strength versus the precious metals is again reflective of the tremendous optimism being exhibited for an economic rebound next year. Similar positive moves can be seen in the energy sector, including energy metals like uranium.

But in addition to virus and lockdown risks which are far from over, investors will likely face new political risks come 2021.

Absent President Donald Trump’s legal team being able to somehow get fraudulent election results overturned in multiple states, Joe Biden and Kamala Harris will take power next month. At the top of their agenda… repealing the Trump tax cuts and raising taxes on investors.

Fox News Anchor: Tax hiker in chief, Joe Biden telling the New York Times, "There's no reason why the top tax rates shouldn't be 39.6%, which it was in the beginning of the Bush administration."

President Donald Trump: He wants to terminate the tax cuts that we gave you.

Vice President-Elect Kamala Harris: Joe Biden has been very clear. He will not raise taxes on anybody who makes less than $400,000 a year.

Vice President Mike Pence: He said he's going to repeal the Trump tax cuts.

Vice President-Elect Kamala Harris: Mr. Vice President, I'm speaking.

The Kings Collage Professor Brian Brenberg: So, when you have somebody talking about raising taxes next year, not just on individuals, by the way, but on businesses as well – the corporate income tax – people start to wonder how's that going to affect my job? And the answer is it will and here's why.

Businesses make decisions about hiring on a prospective basis. They look ahead and they say, "Will I have the money to bring people on board?" And if taxes are going up, that's money, that one way or another, is going to have to come out of workers' pockets.

Higher taxes, higher inflation, or some combination of both seem inevitable given the U.S government’s financial predicament. The next administration will be confronted with a record high budget deficit plus a looming shortfall of trillions more in Social Security and in Medicare.

Raising taxes may be futile given the size and scope of Uncle Sam’s fiscal gap. It may even be counterproductive given the precarious state of the economy and the lessons of the Laffer Curve. Tax hikes may also be politically difficult if Republicans maintain control of the U.S. Senate.

The temptation for the presumptive Biden administration will be to pursue Modern Monetary Theory or something akin to it. Essentially, that would entail coordinating directly with the central bank to print whatever cash the Treasury Department needs.

With former Federal Reserve chair Janet Yellen set to become the next Treasury Secretary, she could usher in a Great Reset of sorts – one that merges fiscal and monetary policy to enable unlimited government deficit spending.

Of course, as with taxes, the costs of financing government spending through pure currency creation will ultimately be borne by wage earners, savers, and poorly positioned investors.

Now is the time for investors to think strategically about how they might protect themselves – in 2021 and beyond – from the twin threats of inflation and taxation.

One potentially powerful strategy to consider is to sock away wealth in a tax-advantaged retirement account funded with physical precious metals. A time-tested way to hedge against currency depreciation combined with a shelter from ruinous taxation is a wealth protection double play!

Maxing out qualified retirement account contributions for 2020 is a great year-end tax strategy.

If you have already maxed out your IRA for 2020, it’s not too early to be thinking about getting a head start on 2021. By making those contributions as soon as possible in the New Year, you can maximize the time those assets enjoy tax deferral.

You can also dedicate new contributions or rededicate existing accounts to the security of physical precious metals.

A conventional IRA, whether Roth or traditional, can be converted to a Self-Directed Precious Metals IRA. Switching is easy. Most providers can enroll you right online and work directly with your existing IRA custodian to transfer funds.

Not only can you purchase, hold, and sell real precious metals inside a tax-advantaged Self-Directed Precious Metals IRA, you can also withdraw your bullion and take direct physical possession of it under normal IRA distribution rules.

The IRS does impose certain restrictions on size and purity, but a wide variety of bullion coins, rounds and bars are eligible. In addition to gold and silver, you can even hold physical platinum and palladium within an IRA.

To get started in funding a Self-Directed Precious Metals IRA, choose a reputable account trustee then arrange for a bullion dealer such as Money Metals Exchange to ship your IRA-eligible bullion to your designated depository. (Money Metals Depository is approved by several IRA trustees such as New Direction and Mountain West.)

In an environment where conventional paper assets begin to underperform amid rising political risks, physical precious metals shielded from taxes could be among the few true safe havens.

Well, that will do it for this week. Be sure to check back next Friday for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a great weekend everybody.

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