Talk of a “border adjustment tax” has gone from the sidelines to center stage in Washington, which has a lot of people asking: What is it exactly?
Currently, U.S. corporations are taxed on their worldwide profits at 35 percent. The House GOP plan would change that radically. The new tax formula would tax domestic revenue (minus domestic costs) at a much lower rate of 20 percent. The net effect would be one that favors exports over imports.
The change would convert the country’s tax system to a “territorial” system rather than a worldwide tax system. It’s meant to create incentives for domestic production because companies also would no longer be able to reduce their taxable income by deducting their overseas expenditures.
The plan would essentially subsidize exports and lead to a 20 percent tax on imports for corporations.
Retailers are very opposed to a border adjustment tax because a large percentage of the products they sell are imported. The end result is Americans will pay higher prices for consumer goods including imported fruits and vegetables.
Now economists who support the tax say the policy would lead to a sharp rise in the value of the dollar. As a result, retailers’ costs will go down so much that it will be a wash to consumers. However, many CEO’s worry whether the economists are right in that assessment.
In the past, gold and gold stocks have been used by money managers to hedge against inflation, currency risk and world chaos. For years, financial advisors recommend having 5% to 7% of your portfolio in gold or gold stocks.
Unfortunately, we have been living with deflation so gold as an investment has not performed very well over the past five years. The chart below compares three ETFs – gold bullion GLD, large cap gold miners GDX and junior gold miners GDXJ
The border adjustment tax could change all that. It could cause mayhem in world trade, leading to higher inflation and extreme volatility in currency markets. The chart below illustrates the 2017 year to date price movements in the above mention ETF’s
The biggest risk to owning gold or gold stocks is if the Fed’s interest rate policy changes and they are more aggressive in raising rates. This could cause the value of the U.S. dollar to increase which would be bad for gold.
Fed watchers believe that the June meeting would be the earliest date for an increase in interest rates. The stock market has only priced in two rate hikes for all of 2017. President Trump’s immigration ban and talk on renegotiating trade deals will be in the news for the next few months making investors nervous.
I am considering three short-term trades in gold
- Dollar cost average: Buy 300 shares of GDX at 24.50, Sell 3 Apr 26 call options for $1.20 & Sell 3 April 24 put options for $1.50 (Total investment = $6540.00 U.S.)
- Covered call: Buy 100 shares of GLD at $116.20, sell 1 April $118 call for $2.25 (Total investment $9,370.00 U.S)
- Call spread: Buy 5 GLD April $110 calls for $7.10 & Sell 5 GLD April $118 calls for $2.25 (Total investment =$2,425.00 U.S.)
The problem with using options in these trade choices is the VIX that measures volatility is quite low. Having to wait until the April 19 expiration date reduces the profit potential. That being said, I think that the first trade is less risky, if I am wrong on the direction of the price of gold. I would own 600 shares of GDX at an average price of $ 22.90 but could then sell more call options.
Do you own any investments in gold stocks or gold ETF’s?
Disclaimer: These are not recommendations, please do your own research before investing.