Direxion Shares Exchange Traded Fund Trust continues to contend with the ongoing weakness in gold prices as Forex continues to influence the market for the yellow metal. Earlier in the week, the price of the yellow metal dropped some of the gains it made in the last two weeks. The situation continued yesterday as the bullion faced headwinds from new uncertainties arising from the Fed’s position to interest rates and the monetary outlook in Europe.
The situation is unchanged today as gold enters another session in which it has to contend with the strong dollar. Gold for Dec. delivery dropped 1% to $1,166 per ounce on the Comex this morning. Spot gold was down 0.6% to $1,168.76 down from a session high of $1,179.20 when the market opened this morning. As expected the major culprits responsible for today’s decline are the uncertainties surrounding the interest rate and a strong dollar.
Analysts weigh in on the strong dollar
The market is filled with hints, rumors, guesses, and estimates about when the U.S. Federal Reserve is likely to raise interest rates and the degree to which the rates will be raised. The market chatter has been the main cause of volatility because Fed appears to be confused on what it intends to do with interest rates. BN Amro analyst Georgette Boele noted that “Higher rates in the United States will support the U.S. dollar versus the euro, so the gold price denominated in dollars will mainly be affected by expectations around the Fed”.
The second reason Direxion Shares Exchange Traded Fund Trust is facing strong headwinds is the strengthening of the dollar against other currencies. Gold is traded in dollars and a strong dollar makes the yellow metal expensive for buyers in other countries. The ECB meeting holding on Thursday will weigh in on the monetary outlook in the EU – this will in turn affect how the dollar fares against the Euro.
An analyst at Natixis, Bernard Dahdah noted that “Gold is just following U.S. (monetary policy)… Gold has risen $75 since early September, based on expectations that a rate hike will happen in 2016, not the end of this year.” OCBC analyst Barnabas Gan noted that “the bullion’s rise above its 200-day moving-average “is a technical sign, no doubt, suggesting some upside risk for gold”.
Volatility returns to gold
Direxion Shares Exchange Traded Fund Trust might continue to see wild swings in the next couple of days as the gold trade remains very far from being stable. Bob Haberkorn, a broker with RJO Futures told the Wall Street Journal “There is very little news and the dollar is rising, and some investors are using the opportunity to take some money off the table”. However, he noted that the bullish case for gold is still strong. In his words, “Many investors are eager to get back into the gold trade if the price drifts lower.”