Gold and ETFs such as Direxion Shares Exchange Traded Fund have a gloomy short-term outlook ahead. The gloomy outlook in the market for the yellow metal lies in the fact that the U.S. Federal Reserve is leaning towards raising interest rates in December. It is no longer news that the bullion tends to lose its appeal when interest rates are increased. The bullion doesn’t pay an income; hence, investors tend to flock to income-bearing assets such as Treasury bills and bonds when their interest rate rises.
Last week, the yellow metal posted its biggest lost in three weeks with a weekly decline of 5%. The yellow metal closed down 0.2% on Friday to settle at $1,255.50 an ounce and the yellow metal has lost 3.79% in the last one month. Yet, analysts eat UBS think that gold will score a stunning comeback that might erase the losses.
Gold is about to retreat deeper into bear territory
If you have gold or Direxion Shares Exchange Traded Fund in your portfolio, you should brace up for a disappointing end of the year outing. UBS analysts Wayne Gordon and Giovanni Staunovo have observed that the chances of a Dec rate hike are high and that the yellow metal will suffer when the fed triggers the rate hike. The analysts observe that gold could fall as low as $1,225 an ounce in the next three months as investors move their money out of bullion into bonds.
Analysts at 24option have also observed that the U.S. dollar has been on an uptrend in recent weeks as economic and geopolitical concern continues to weaken rival currencies. Last week, the WSJ Dollar Index advanced 0.39% last Friday to end the session at 88.46 but it holds a decent weekly gain of 1.24%. A strong dollar also has an adverse effect on gold prices because the bullion becomes more pricey for people with foreign currencies when the greenback is strong.
More so, the minutes of the September FOMC meeting that was released last week suggests that the Fed has made up its mind about raising interest rates. Fed chair, Janet Yellen says, it doesn’t make economic sense to keep interest rates low because the low interest rate “could have costs that exceed the benefits by increasing the risk of financial instability or undermining price stability.”
Analysts see light at the end of the tunnel for gold
Interestingly, market watchers think that gold and Direxion Shares Exchange Traded Fund have a brighter future ahead despite the fact that short-term clues indicate a gloomy outlook. UBS analysts are optimistic that gold will find enough reasons to soar once the December rate hike is done with. The analysts noted that the fear of a rate hike is already baked into bullion prices and that the yellow metal is not likely to suffer much more than it has already done.
The analysts noted that investors could see a significant uptrend in gold prices in the next six to 12 months. The bright outlook on the bullion is hinged on the fact that economic trends suggests that the fed cut interest rates drastically next year. The analysts observed that “A slow moving Fed and a moderate pickup in inflation should push real interest rates deeper into negative territory in 2017… “Historically, this has acted as a powerful driver of higher gold prices.”