Direxion Shares Exchange Traded Fund Trust looked like it would have a great day in today’s session as the ETF recorded gains of 1.87% in pre-market trading to $3.75. However, the market was a killjoy as the ETF took a 3.20% haircut to $3.63 as at 10:17AM EDT. It appears that the market is still been cautious around gold ETFs even though the yellow metal climbed to a three-week high on the strength of the news that China has devalued the Yuan.
The Peoples Bank of China has devalued the Yuan by setting its midpoint at 6.2298 against the U.S. dollar. The PBOC slashed its reference rate by 1.9% to trigger the biggest day-drop in the Yuan since the end of Chinese dual currency system in 1994.
PBOC sends gold up
Gold prices have dropped to a five-year low in July after dropping for 8 straight sessions. The move by the PBOC has sent gold prices up because the devaluation of the Yuan makes gold more expensive for domestic Chinese gold buyers. China drives about a third of global demand and a weak Yuan means that they must pay more to buy gold.
Gold for December delivery closed with 0.9% gains at $1,104.10 a troy ounce on the Comex division of the New York Mercantile Exchange. Yesterday’s gain was the highest gain since July 20.
The Direxion Shares Exchange Traded Fund Trust was bearing the brunt of China’s currency change on Tuesday.
Gold not yet in the clear
However, some experts believe that a weak Yuan might cause the demand for gold to fall when Chinese folks find the yellow metal expensive. In fact, the devaluation of the Yuan introduces additional volatility into the global market as other Asian countries consider weaker exchange rates. An economist with OCBC Bank in Singapore, Barnabas Gan says, “If anything, it may worsen the gold demand”.
Another analyst, Paul Bloxham, chief economist for Australia and New Zealand at HSBC also thinks that the devaluation of the Yuan will be bad for gold prices. In his words, “in the short run, this [devaluation] is more bad news for commodity prices. A weaker Chinese currency is likely to mean weaker demand for internationally produced commodities.”
Going forward, the Direxion Shares Exchange Traded Fund Trust might not offer much attraction to investors as the future of gold continues to remain uncertain. The decline in the ETF in the morning trading session confirms the fact that investors are not likely to be looking at gold for a safe haven in the short term.
In the words of Jonathan Barratt, chief investment officer at Ayers Alliance when speaking about gold, “From a technical perspective… it doesn’t look hot… He said that the price of the metal has “broken through some very critical areas.”