One Thing Both Republicans and Democrats Should Agree On: Buy Gold

During the Obama Presidency, gold somehow became politicized. Glenn Beck, for one, seemed to suggest to viewers that Obama’s election foreshadowed the end of the world as we know it, then popped up in the commercial breaks urging viewers to buy gold. As these things tend to go, the fact that gold was therefore appealing to many on the right made it despised by those on the left.

Now, that politicization of the commodity has faded, even as partisanship has intensified. That is a good thing because however your political bias leads you to view the Senate tax reform bill, its likely passage means that you should be buying gold.

Regular readers, if such a thing exists, will be aware that one of my favorite trade set-ups is when basic, simple technical analysis suggests a trade with short-term potential, and fundamental analysis points to a longer term move in the same direction. That is something that happens less often than you might think, but when it does it offers a chance to get in on a trade that has very limited downside risk and a big upside, and it is the case right now with gold, or its trading substitute GLD.

The chart shows that since it constituted the high in March of this year, the $120 level has proven significant on multiple occasions. Even when the level has been broken eventually, it has usually been a stopping point for moves both up and down, which makes it a solid support level off which to trade.

Buying here at around $121 with a stop loss to allow for a false break of the support, say at $118, risks only around 2.5% of your investment so is, as I say, a fairly inexpensive proposition should things not work out. That, combined with a target just below the 52-week high of $128.32, say around $127, makes for a short-term trade with a good chance of success and a good risk/reward profile, but when you look at the fundamental case it becomes clear that the upside is much greater than that.

As most of you have no doubt heard, the Senate recently passed a tax bill and, given the Republicans’ desperate need for a legislative win, said bill looks likely to be adopted by the House without too much trouble. There are two schools of thought about the tax cuts in that bill; they can be regarded as either pro-growth or deficit busting, depending largely on one’s political affiliations.

If either of those proves to be true, however, a case can be made that an investment in gold will pay off.

If, as Republicans claim, these cuts will cause corporations and wealthy people to see the light and start investing heavily and promote significant growth, it would not only boost GDP growth, but also create a lot of jobs. You might think that is never a bad thing, but with an unemployment rate around four percent and signs of some upward pressure on wages in the second half of this year it will certainly add to fears of inflation taking hold.

Gold is used by traders as a hedge against inflation, so if Republicans are right and we get a big boost to growth, gold buyers win.

Democrats, on the other hand, maintain that corporations and rich people will simply hoard all the benefits of lower taxes, probably while rubbing their hands together and cackling. In that case, growth would not materialize, and the revenue reductions would add massively to the deficit and therefore the debt, which is already over $20 trillion.

The yellow metal is, in addition to a hedge against inflation, a safe-haven play used by traders when they fear disruption, and there is nothing I can think of that would be more disruptive to the global economy that even a hint of a bankrupt America. So, if Democrats are right, gold buyers win.

It is nice when, in these divisive, partisan times, there is something that unites those of both political persuasions, and buying gold should be just that. The two sides may have completely different expectations from the tax cuts and therefore different reasons for doing so, but whoever turns out to be right the effects on the economy will probably be such that both will end up in profit. Making money, it seems, is one of the few things left that has no partisan slant.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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