Gold has taken a dive and investors with exposure to the Direxion Shares Exchange Traded Fund are running around like headless chickens. On Tuesday, the yellow metal recorded the biggest loss in three years after a strong dollar strengthened the possibility that the Fed might raise interest rates this year.
Yesterday, gold for October delivery crashed 3.3% to $1,266.30 an ounce to mark the lowest trading price since June 23. The decline in the price of the bullion also marks the biggest daily loss since December 19, 2013. The Direxion Shares Exchange Traded Fund also recorded a massive 29.24% decline to $12.63.The trading loss seems to be sweeping across the precious metals market as Silver also crashed 5.8% to $17.71 an ounce to mark the biggest daily loss since January 2015.
Strong Dollar and Fed’s hawkish tone weakens gold prices
The first reason behind the weakness in gold and the Direxion Shares Exchange Traded Fund is the newfound strength in the U.S. dollar. On Tuesday, the USD was strengthened by 1.2% to ¥102.89 to mark the highest exchange rate since September 5.
The second reason behind the weakness in gold is the upbeat economic report that was released on Monday. The third reason behind the weakness in gold is that Federal Reserve Bank of Cleveland President Loretta Mester has maintained that the Fed must raise interest rates by December.
However, analysts think that the massive decline in the bullion looks more like a function of profit-taking selloff rather than a function of fears about an increase in interest rates. The yellow metal is up 19.34% in the year-to-date period and Silver is up 29% in the same period. Hence, investors might actually be cashing out their positions in order to lock in YTD gains. Bart Melek, head of commodity strategy at TD Securities says “this is very much a case of people paring down their positions.”
The crash in bullion prices might be a great chance to buy on the dip
Many investors and analysts are fearful about the crash in the yellow metal and Direxion Shares Exchange Traded Fund . For instance, John Davies, a global industry strategist at BMI Research notes that “I think any strength of the U.S. economy is going to be negative for gold.”
However, gold bulls think that the current decline might be a great opportunity to buy the yellow metal at a discount. For instance, Ross Norman, chief executive officer at Sharps Pixley observes that “It is clear to us that the rationale for buying is more powerful than any time in living memory and these retracements have been few and far between”.
Norman also notes that it would be smarter to buy bullion as a long-term investment instead of chasing gains. In his words, “Love them or hate them, the speculators can wreak havoc on markets in the short term, but for long term investors it amounts to little, and for those that missed the great bull run of [the first half of 2016], it provides a great buying opportunity and [chance to] get in on the act.”
Nevertheless, the bullion is not doomed – at least, not until the market takes a reading of the economy based on the September jobs number due on Friday. Brien Lundin, editor of Gold Newsletter observes that “a disappointing jobs number would send gold significantly higher, while a positive report would exacerbate the downward trend. The stakes have been raised yet again.”