There are many possible unforeseen consequences to Elizabeth Warren’s proposed wealth tax, but one in particular hasn’t been discussed much. That is, it could have serious implications for precious metals prices, pushing them much higher - and not just ephemerally. Any sustained wealth tax could raise the prices of monetary metals for as long as the tax remains legally in effect.
What do gold prices have to do with a wealth tax? Actually, it flows logically from the combination of human nature and the global financial regulatory environment.
Warren’s wealth tax proposal is commonly termed a tax on billionaires, but her plan would directly affect anyone with a combined net worth of at least $50 million. Those above that threshold would have to pay a 2% annual tax, while anyone over the $1 billion mark would have to pay 3% every year. Obviously, human nature being what it is, those affected will do everything they legally can to avoid the tax, perhaps by apportioning their wealth among trusted family members or other accounting tricks. This may be doable for the low end of the ultra-wealthy, but billionaires would likely have to resort to other methods.
Since the passage of the Foreign Account Tax Compliance Act (FATCA) in 2010, tax havens have been much harder to come by. If we were talking about the pre-FATCA era, then much of the capital of billionaires would simply head overseas to foreign banks. With FATCA in place, this doesn’t accomplish much anymore. The money would probably not be able to head into foreign equities either, because FATCA-compliant banks are still in charge of these accounts. It would be equally difficult to sink this money into foreign real estate because banks are involved in these transactions as well; wealth in this form would still be reported.
It is conceivable that many billionaires could resort to storing a portion of their wealth outside the global banking system entirely, and one of the more stable ways to do that would be to convert it to gold. Gold storage services are not banks and therefore not subject to FATCA requirements, and so much of this wealth could end up being hidden from the government’s view.
Billionaires would probably not wait for a Warren presidency and the passage of a wealth tax to start this process. If it starts to look like she, or another candidate with similar ideas such as Bernie Sanders, had a reasonable shot at the White House, we could start to see strong money flows into gold and other precious metals from this direction.
Gold has been in a new bull market for nearly four years now. Central banks around the world have begun accumulating the metal at an accelerated pace. Since 2015, global central bank gold reserves have risen by 4.2%, or 1,392 tons, according to the World Gold Council. That may not sound like a lot, but to put it in perspective, during the largest and longest gold bull market in history from 2000 until September 2011, global central bank gold holdings actually fell on a sustained basis by 7.1%. During the last bull market, central banks were net sellers. This time they are net buyers.
Faced with the prospect of being taxed 3% every year for having a certain amount of wealth, and with fewer and fewer available methods to escape the tax, the billionaires of the US could soon be funneled into joining central banks in further fueling the gold bull market.
Disclosure: Long GLD.
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