The end of the current pullback in gold might be in sight after the bullion and Direxion Shares Exchange Traded Fund Trust ended Tuesday’s session with gains. Gold investors saw a ray of hope after the bullion ended the session with gains of 0.1% to settle at $1,320.80 an ounce. You’ll remember that the bullion had lost almost 1% in the previous two sessions. As expected, the Direxion Shares Exchange Traded Fund Trust gained a decent 7.98% to close at $131.02.
However, the gains are not likely to hold in mid-week trading today because the bullion has started to trade lower in Asia this morning. This piece examines the reasons behind the rally in the bullion on Tuesday and it examines why the yellow metal is starting with losses straight out of the gate on Wednesday.
Gold found strength against a backdrop on the weak dollar on Tuesday
Since the markets opened for trading on Monday, it was obvious that investors were paying attention to the two-day policy meeting of the Feds holding between July 26 and July 27. Fed officials have not been able to agree on when to raise interest rates and they don’t have a consensus on how much the rates should be raised. However, the market understands that the Fed will not raise interest rates in July and that a rate hike might not happen until September.
However, investors will dissect and analyze every word in the minutes of the Fed’s meeting to get an insight into the plans of the policymakers. Hence, the prevailing market sentiment was that gold and the and Direxion Shares Exchange Traded Fund Trust will trade sideways until the minutes of the policy meeting was released.
However, in a surprising plot twist, the dollar fell on Tuesday against the Yen even though it found strength against the Euro. The WSJ Dollar Index, which tracks the dollar against a basket of currencies declined 0.2% to 87.86 to confirm the weakness in the greenback and the dollar declined 1.1% against the yen at ¥104.63. Interestingly, investors exploited the weakness in the greenback to buy the bullion at a “cheaper” price and the increase in demand for bullion led to an increase in its prices.
Gold is already down in Asia this morning
Nevertheless, the hopes of a rally in gold have been dashed and the yellow metal is out with losses in Asia this morning. Breaking news out of Asia suggests that Japanese Prime Minister, Shinzo Abe is getting a stimulus package ready for the Japanese economy. A stimulus package would provide a buffer to the economy and reduce investors’ desire to seek refuge in safe-haven assets.
In response to the hopes of a stimulus package in Japan, gold lost 0.2% and it currently trades down at $1,318.15 an ounce in Singapore. In a direct response to the weakness in gold, the Direxion Shares Exchange Traded Fund Trust is already down 0.28% to $130.65 in pre-market trading as at 4:47AM EDT.
However, analysts think that the weakness in the bullion is not likely to continue once the minutes of the Fed’s meeting is out today. Bryan Lum, a strategist at Phillip Futures observes that “While expectations are high for the Fed to signal a December or even September rate hike, the central bank is more likely to disappoint with a more dovish statement.”