Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) was soaring on the wings of bullish tailwinds on Monday after the bullish rally for Gold returned to the market. Monday was a pleasant day for gold bulls after the yellow metal recorded its best monthly gain since 2012. However, Tuesday told a different story all together for the yellow metal after the bullion dropped some of the gains from Monday. On Tuesday, Gold for April delivery was down 0.3% to close at $1,230.80 an ounce.
Why is the gold rally slowing down?
The gold rally is currently having hiccups after U.S. economic data showed that the outlook might not be as bad as Wall Street has feared. On Tuesday, the Institute for Supply Management released ISM mfg data for February – the measure climbed to 49.5 to signal the fifth straight month of contraction. A reading above 50% suggests that the economy is expanding and a reading below 50 suggests that the economy is contracting. However, Tuesday’s 49.5 reading is lower than the consensus estimate of 48.6 and it is higher than the 48.2 reading recorded in January.
The prospects of the yellow metal were further dimmed by data from the Commerce Department showing an increase of 1.5% in construction spending in January. Construction spending is one of the surest measures to know the state of the economy. When the economy is weak, construction spending tends to fall and improved economic conditions often lead to an increase in construction spending.
Tyler Richey, co-editor of The 7:00’s Report notes the better-than-expected data has “spurred a hawkish correction across asset classes, which is bearish for gold… But so far, ‘correction’ is all the pullback in gold can be referred to as the uptrend in gold that dates back to the beginning of the year remains very well intact, with key support lying well below the market at $1,200 an ounce.”
The strong economic data also provided the U.S. dollar with tailwinds as the WSJ Dollar Index recorded a 0.06% increase. A stronger dollar naturally makes the yellow metal more expensive for buyers using other currencies. Hence, strong economic data often exerts downward pressure on gold and the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) from two pressure points.
Will gold march higher in March
Investors in physical gold, mining stocks and ETFs such as the Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) will surely be paying special attention when the U.S. jobs report is released on Friday. The content of the jobs report will either confirm the improved economic trends or dispel the gains as a fluke. If the U.S. labor show signs of improvement, the U.S. Fed will regain its optimistic outlook about the U.S. economy and we might start talking about additional rate hikes.
In contrast, a weak jobs report will show that the ISM data was a fluke and gold bulls will roar louder once more. In the words of Naeem Aslam, chief market analyst at AvaTrade the jobs data “will make or break the rally [for gold], but we envisage that the bias remains towards the upside.” For now, we can only fold our arms and wait until the jobs report is released in Friday.