Gold is starting out this week with losses straight out of the gate in response to indicators that the U.S. Federal Reserve will soon raise interest rates. Technical analysts think that investors should brace up for a season of weakness in the yellow metal and its related ETFs such as the Direxion Shares Exchange Traded Fund Trust .
Last week, the bullion took a breather to record some losses after investors choose to stay on the sidelines ahead of the speech by Federal Reserve Chair Janet Yellen on Friday. However, Yellen did not do much to assuage the fears of gold investors about the prospects of a rate hike.
Over the weekend, investors have had time to digest Yellen’s Friday speech and there seems to be a tacit conclusion that the outlook for the bullion is not as rosy as it used to be. An increase in interest rates is often a curse for gold prices because investors often leave gold for other income-bearing assets such as bonds when there is increase in interest rates.
Gold is starting the new week with losses
This morning, gold is in the red but the U.S. dollar is enjoying a smooth ride in European markets. Spot gold is down 0.21% to $1,321.20 an ounce and gold for December delivery is down 0.35% to $1,321.20 an ounce. As expected, the Direxion Shares Exchange Traded Fund Trust is already down 1.51% in premarket trading to $21.83 this morning.
The main reason behind the weakness in the bullion this morning is that investors are reacting to increased possibility of a rate hike as expressed in Yellen’s speech. Yellen had noted that the Fed is more optimistic about raising interest rates because of the recent gains in the labor market. The fed is also expecting moderate economic growth in the coming months – economic growth also bolsters the case for raising interest rates.
Some analysts believe that the renewed push by the Feds to raise interest rates will be dollar positive and bullion negative. For instance, Edward Meir, an analyst with INTL FCStone observes that “We think the pressure on gold will likely increase as we go into September, as participants are now more willing to bet on a rate hike given what they have gleaned from top Fed officials on Friday.” Against the backdrop of a possible rate hike, Reuters’ technical analyst, Wang Tao has maintained that the yellow metal might drop down to $1,308 an ounce.
Here’s the not so likely bullish case for gold
The outlook for gold and Direxion Shares Exchange Traded Fund Trust is not looking rosy; nonetheless, investors still have a glimmer of hope. To start with, the market is yet to begin the usually volatility that occurs in an election year; hence, the bullion will still offer stability when the reality of the election sets in.
More so, things seem to have returned to normalcy after the Brexit vote but that historical vote has changed the world forever. The effects of the Brexit vote have not started showing up but the market will soon have to deal with the reality that the U.K is no longer part of the European Union.
OCBC Bank analyst Barnabas Gan “I think gold prices will still see support at about $1,300 despite what has been said in the Jackson Hole (Fed) symposium. It is of no doubt that the rate hike expectations have gone up for the year ahead.”