Direxion Shares Exchange Traded Fund Trust might start trading today from a position of weakness as gold starts the new week on a less than impressive note in Europe. The near-term fate of the yellow metal is tied principally to how UK votes on Wednesday. On June 23, Britain will go to the polls in a referendum to decide on whether the UK should stay or leave the EU.
Last Friday, the “Brexit” camp suffered a drop in public approval after a vocal “Bremian” lawmaker was murdered. Many people have hinted that Britain’s exit from the EU might plunge Europe into a recession; thereby, causing the yellow metal to rise. However, gold might lose some of its short-term attractiveness if Britain votes to stay in the EU.
Weak Brexit camp is forcing weakness on gold
The weakness in the Brexit argument after the murder of UK lawmaker, Jo Cox last week is already forcing Direxion Shares Exchange Traded Fund Trust lower. This morning, spot gold dropped by 1.1% to $1,284.50 an ounce even though it gained almost 2% last week. Gold for August deliveries fell by 0.5% to $1,287.90. One of the reasons behind the weakness in the yellow metal is that the Pound found strength against the dollar on sentiments that UK won’t leave the EU.
In the U.S., equities could see much volatility and heavy trading this week as investors brace up ahead of the Brexit vote. The U.S. Federal Reserve is losing credibility about its seriousness to raise interest rates and investors are not worried that a rate hike might be on the horizon. St. Louis Fed President James Bullard noted that “the New York Fed lowered its forecasts for U.S. economic growth in the second and third quarter largely due to recent negative data on domestic manufacturing activity”.
Increased uncertainty might return even after the “Brexit” vote
Investors in the bullion and Direxion Shares Exchange Traded Fund Trust should expect to see increased volatility going forward. One of the reasons behind the potential increase in volatility is that much of the fears about a “Brexit” vote has already been priced into the bullion and equities. Edward Meir, analyst at FCStone notes that “we have to suspect that markets will remain quite choppy in the lead up to the British vote and in gold’s case, the path of least resistance will likely be higher.”
Meir goes on to say that, gold bulls might be underwhelmed even if Britain votes to leave the EU. In his words, “There could be a “post-vote” let down on Friday and heading into the following week, especially if investors realize that a ‘Leave’ vote is not going to have the Armageddon-like ending many are fearing.”
However, the bullion might perform true to form and reward investors after the Brexit vote because there’s an increase of inflows into gold-backed ETFs. Interestingly, fund managers are starting to become more vocal about the bullish thesis on the yellow metal. Mark To, head of research at Wing Fung Financial Group in Honk Kong notes that “The best case scenario for gold in the coming few days is that it stabilizes at the current level just ahead of the $1,300 resistance level… By the end of June, I think $1,300-$1,400 should be relatively a reasonable price for gold.”