Direxion Shares Exchange Traded Fund Trust lost its footing today and the ETF is ending this week on a highly pessimistic note because of the gloomy outlook for gold. As at 1:19PM EDT, the ETF has lost 2.13% to $86.99 after it had earlier touched a session low of $82.28. Gold is being mauled in today’s session after U.S. Federal Reserve officials hinted that they could try to raise interest rates in June.
Of course, the prospects of June rate hike suggest that the U.S. economy is recovering at a faster pace; hence, the dollar is finding strength against other currencies. A stronger dollar often spells doom for the yellow metal and the bullion is treading a path that will lead to its biggest weekly decline in the last 7 weeks.
Stronger dollar weakens the bullish case for gold
Gold is managing to find support at the $1,250 an ounce price point even though it has lost about 2% since news broke on Tuesday that the Fed might raise interest rates in June. This morning, spot gold was practically flat at $1,254 an ounce even though it touched a three-week low of $1,244 on Thursday. Gold for June delivery was down a massive 1.5% to $1,254.80 an ounce.
Investors are worried about the rate hike in June and many of them are not sticking around the bullion or Direxion Shares Exchange Traded Fund Trust to find out if the fed was bluffing or serious. Edward Meir, independent commodity consultant at INTL FCStone notes that “the central bank is warming to the idea of a rate increase come June, especially…if the economic data continues to improve and if inflation moves towards the Fed’s 2% target.”
Meir takes the bearish stance in saying, “Just as the prospect of extended low rates and a weaker dollar provided commodities with considerable tailwinds earlier in the year, the reverse could be at work now, as rising rates and a stronger dollar pressures prices lower… Gold will likely be a front-casualty in such a retreat.”
Bullion might defy expectations
Many investors are looking for exits out of the bullion and Direxion Shares Exchange Traded Fund Trust ; yet, the yellow metal might turn the apparent lemon of a June rake hike into a golden colored lemonade. The conventional wisdom holds that an increase in interest rates is often bad for gold but analysts at Capital Economics think that the bullion could defy conventional wisdom.
Julian Jessop, head of commodities research at Capital Economics notes that “gold and silver prices actually rallied in the weeks and months after the Fed first raised rates last December.” He noted that the bullion was able to hold the forth after the December rake hike because of safe-haven demand in response to fears of a slowdown in the global economic landscape.
Interestingly, Adam Koos, president of Libertas Wealth Management Group also supports the bullish thesis on gold. He says, “There is too much risk in the equity marketplace… Stock bulls are “losing their religion to the church of gold… If I weren’t already long gold, I’d be buying on this dip as I don’t see it falling much lower than $1,115, even in light of the Fed’s hawkish comments.”
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