Direxion Shares Exchange Traded Fund Trust lost its footing yesterday and the ETF closed down at $97.50 with 3.54% in loses. The losses in the ETF echoes the losses that was recorded in gold trading during the session after investors started reconsidering their position in the yellow metal. The yellow metal recorded a sharp uptrend last Friday after the Labor Department reported that U.S. employers added the lowest number of jobs in May.
Many of the gold investors who have hitherto been on the sidelines rushed back to take bullish positions in the yellow metal and the bullion recorded gain last Friday and on Monday to mark the highest gain in two weeks. The resurgence of bullish sentiment in gold could be linked to an optimistic view that the U.S. Federal Reserve will have a less-compelling reason to raise interest rates when it meets next week.
Frank McGhee, head precious-metals dealer at Alliance Financial provides an insight into the reason behind the weakness in gold. He says, “You’ve got a lot of people that were sucked in” on Friday… And now that they start thinking about it, June was never a viable raise date, but July is there.”
Gold investors have a rethink on the fundamentals of the bullish thesis
However, it appears that buy-side investors in the yellow metal and Direxion Shares Exchange Traded Fund Trust are being cautious about going all the way with their bullish convictions. On Tuesday, the yellow metal lost some of previous gains as investors start to review the possibility that the Fed might raise rates in July even though a June rate hike is unlikely.
On Tuesday, Gold for August delivery settled with $0.40 at $1,247 an ounce after it had earlier touched a session low of $1,236.90 an ounce. Adrian Ash, head of research at BullionVault notes that “gold looks set to drift into summer as usual… This year it’s caught in the doldrums between ever-lower interest rates world-wide but also new record highs in the stock market… the Fed’s statement will need to maintain the pretense of wanting to hike sometime soon”.
Nonetheless, some analysts are still keeping the bullish hope alive. For instance, Peter Grant, chief market analyst with USAGOLD notes that “You may recall that rate-hike expectations surged in the wake of the release of the minutes from the April [Federal Open Market Committee] minutes on May 18—supported by subsequent FedSpeak—putting gold under pressure… The yellow metal was trading above $1,270 [spot] at the time, so I think there’s a pretty good chance that’s where the market is headed back to in the short term.”
Where is gold headed?
Gold and its derivative ETFs such as Direxion Shares Exchange Traded Fund Trust have mostly been driven by sentiment this year – the sentiment mostly revolved around the plan of the Fed to raise interest rates. An increase in the interest rate will erode the safe-haven appeal of gold because other assets that pay an interest will look more attractive to investors.
However, Jessica Fung, a metals strategist at BMO Capital Markets wrote in a note that “focusing on the Fed alone is simplistic and only drives very near-term sentiment and volatility… The potential impact of sluggish global growth on the U.S. economy should not be ignored.”