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Gold and Direxion Shares Exchange Traded Fund (NUGT) Fall; Buyers Lose Appetite as Rake Hike Looms

Gold Bars - Square NUGT - Gold Price

Gold took a not so surprising turn for the worse on Tuesday after the U.S. Federal Reserve adopted a hawkish stance to interest rates last weekend. Interestingly, the Direxion Shares Exchange Traded Fund Trust was down a massive 14.65% to end the session at $18.76. Federal Reserve Chair, Janet Yellen had hinted that the fed might raise interest rates much sooner than expected and Fed vice chair, Stanley Fischer has revealed that a September rate hike is possible.

Direxion Shares Exchange Traded Fund Trust (NUGT) Gold

Gold crashes to a two-month low

The yellow metal is down to a two-month low and analysts expect the weakness to continue in the near term. Gold for December delivery was down 0.8% in the last session to settle at $1,316.50 an ounce. Tuesday’s closing price marks the lowest closing price in the bullion since June 23 before the yellow metal started enjoying bullish tailwinds in response to the Brexit vote.

However, an uptrend in U.S. economic data as evident in strong job gains suggests that the Fed has a compelling reason to seriously consider raising interest rates. An increase in interest rates often weaken investors resolve to hold gold or ETFs such as Direxion Shares Exchange Traded Fund Trust because the bullion doesn’t yield an income.

Hence, the general sentiment on Wall Street is that the economic data and words from fed officials will drive the price of the bullion in the next couple of months. David Govett, head of precious metals at Marex Spectron observes that “Every figure will be scrutinized for a clue on rate rise timing and every Fed speaker will be closely followed for the same reason. This unfortunately means that the gold market will continue to act in an unseemly fashion and that we will all have to trade it accordingly.”

The bullion might fall lower going forward

Interestingly, analysts think that the weakness in bullion and Direxion Shares Exchange Traded Fund Trust is just starting out and that the yellow metal might fall much lower in the coming months.  Last week, technical indicators showed that the yellow metal might fall to $1,280. Tom McClellan, editor of The McClellan Market Report newsletter thinks the bullion can fall much lower.

While speaking on CNBC’s “Closing Bell”, McClellan noted that the yellow metal trades in an 8- year cycle with 5 years of gains and three years of losses. He observed that “We’re still working on the five years down from the 2011 to 2012 top, and that’s due to bottom late this year, early next year… However, 2017 and 2018 should be a hugely bullish time for gold.”

Interestingly, the weakness in the bullion is likely to be worsened going forward because gold’s biggest buyers have started to lose their appetite for the yellow metal. The World Gold Council reveals that global central banks have stated reducing that erstwhile insatiable appetite to increase their gold reserves.

Statistics from the WGC shows that central bankers have reduced their gold demand by as much as 40% in Q2 2016 to mark the lowest central bank demand for gold since 2011. One of the reason behind the weakness in central bank demand for gold is that emerging market now have less money to spend on increasing their gold reserves because of a plunge in the price of exports such as iron ore and crude oil. The WGC noted that “emerging markets are dealing with a lot of headwinds. So you’re going to see a slowdown in all of the assets they purchase.”

 

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