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June 7, 2021

Could Biden's Budget Spell Trouble for the Dollar and how could it Impact Gold?

Theo Ashley-Hacker

Last Weekend President Joe Biden released his first annual budget - a $6 trillion spending plan that includes new social programmes, investment in the fight against climate change and steep tax increases for wealthier Americans. Should it pass congress, national debt is predicted to reach 117% of GDP by 2031, surpassing levels seen during World War Two, despite at least $3tn in proposed tax increases on corporations, capital gains and the top income tax bracket.

What could this mean for the US Dollar?

Any substantial spending or printing of money is considered bearish for a currency in the long term as product prices rise and become less competitive internationally, the currency becoming less sought after. Tax increases will decrease the incentive for foreign investment in the US and may result in individuals and some corporations moving their operations oversees. However there could be some short term optimism for the dollar in the short run as investors bet on future interest rate rises to slow spending. Keep an eye on releases such as CPI and Fed Chair Powell's statements for hints of interest rate hikes.

How could this Impact Gold?

Gold is seen as a safe haven and is often referred to as a hedge against inflation, as unlike government regulated currencies, you can't print more gold so naturally over time, it gains value. This is why gold is likely to accelerate in its bullish run fuelled by dollar inflation. It's possible that debt continues to rise to the point where investors begin to loose confidence in the economy at which point they may sell assets such as bonds and move into gold. It is also important to remember that gold is most commonly traded in US Dollars so any depreciation of the USD will cause an appreciation of Gold against it.

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