Direxion Shares Exchange Traded Fund Trust had a rough day on Wednesday and investors are probably licking their wounds in private as they await direction about where gold is headed from economic data due this week. The ETF crashed by a massive 15.69% to close at $87.42 after touching $123 on Tuesday. Gold prices crashed on Wednesday because strength in the U.S. dollar returned with vigor and investors started taking profits from the yellow metal to cash in on previous gains.
As at market close yesterday, gold for June delivery was down 1.4% to $1,274.40 an ounce. The weakness in the bullion contrast sharply with the gains recorded on Monday – the gains had caused some analyst to forecast that the yellow metal will reach $1,300 an ounce by the end of year.
Why is gold being mauled?
The main issues currently affecting the price of the yellow metal and Direxion Shares Exchange Traded Fund Trust are U.S. Federal Reserve economic policy, interest rates, and U.S. dollar. The fed has refused to raise interest rates in April because the economy was not strong enough.
The April U.S. jobs report is due to be released on Friday and investors are waiting on the jobs data to get insight into the health of the U.S. economy. However, impressive jobs data could suggest economic growth and thereby encourage the fed to raise interest rates. Bob Haberkorn, senior market strategist at RJO Futures notes that “there is talk of a June rate increase, you’re seeing some money come off the table ahead of the jobs data”.
The last couple of jobs reports have showed growth in the U.S. employment sector; growth in the employment indicates growth in the economy, a growing economy leads to a stronger dollar, a stronger dollar weakens the demand for gold, and reduced demand for gold leads to lower prices. Nonetheless, ADP jobs number, which tracks private sector employment, shows that employment slowed down in April. ADP reports that private sector employers added 156,000 jobs in April, compared to 193,000 jobs earlier in March.
Where is gold headed?
Gold has touched $1,300 a couple of times in the last couple of sessions but the yellow metal has been unable to establish a support. As expected, the Direxion Shares Exchange Traded Fund Trust has not been able to climb to new highs because the rally in gold has stalled. Commerzbank analysts note that “clearly the $1,300 mark is an obstacle that is not so easy to overcome. What is more, physical demand also appears to cool at this level.”
In addition, billionaire investor, Stan Druckenmiller thinks that the stock market has exhausted its bullish run and that the smart money is on gold. During the Sohn Investment Conference in New York, Druckenmiller noted that “I now feel the weight of the evidence has shifted the other way; higher valuations, three more years of unproductive corporate behavior, limits to further easing and excessive borrowing from the future suggest that the bull market is exhausting itself.”
In lending is bullish voice to the prospects of the yellow metal, Druckenmiller notes that economic policy from central banks will continue to favor gold even as the fed start to consider the idea of negative interest rates. He says of gold, “some regard it as a metal, we regard it as a currency and it remains our largest currency allocation,”