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China Gold Hoard Digs 98% Loss for Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT)

Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) falls

Direxion Shares Exchange Traded Fund Trust fell by more than 7 percent right after the market opened on Friday morning as the price of gold across the world. Despite risky conditions in Europe and China, and a coming rise in rates in the US, the price of the yellow metal is testing lows not seen in years.

Direxion Shares Exchange Traded Fund Trust

Direxion Shares Exchange Traded Fund Trust began trading at close to $400 in 2011 and briefly hit above that level before starting a long downward trend over the last four years. Shares in the ETF have now lost more than 98 percent of the value they began trading at, yet volume still hits tens of millions of shares traded per day.

China reveals gold hoard

China revealed its gold reserves for the first time since 2009 this morning, an unexpected move that may have shaken the market. The state said it now held 1,658 metric tons, a 53 percent jump from the 1,054 tons the country said it held in 2009.

 

The numbers are much lower than previously believed, and they show that China’s government may not be in love with the metal as much as its citizens are. Earlier this year Bloomberg Intelligence said that it reckoned the state was holding 3,500 metric tons of the metal.

Carsten Fritsch, an analyst at Commerzbank AG said he expects China to keep buying Gold. “I don’t see why that trend will slow down. I think it will continue into the future at the same pace at least,” the analyst told Bloomberg on Friday morning.

Traders aren’t taking the news all that well. China’s gold buying is low, at about 100 tons per year over the last six years. That’s less than 2% of world demand. Bloomberg had previously estimated that the state was buying 4-500 tons per year.

Following a gold ETF

The fall in the Direxion Shares Exchange Traded Fund Trust as a result of the news is not a surprise. Momentum around Gold has been bad for years as inflation expectations stayed low. Many traders bought gold in order to hedge the risk of currency weakness brought on by novel central bank policies.

The ETF tracks the daily price of the NYSE Arca Gold Miners Index (GDM) and seeks to multiply those returns by 300 percent. In the case of the index falling, as it has done over the last number of years, the losses are also multiplied by the same factor.

That’s how a leveraged ETF works, and anybody who has tried to play the Direxion Shares Exchange Traded Fund Trust from the start has seen huge losses.

With a rate rise on the way, and more pain for gold forecast ahead, those holding shares in the index might be in line for pain. On this morning’s market gold hit new lows of $1,130, a level not seen since 2010.

Todd Gordon, a technical analyst warned of the fall on CNBC on Tuesday. “I think we need to be prepared for what the biggest casualty of a rate hike could be, and that’s gold,” he said.

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