U.S. Olympiads are picking up gold medals in Rio de Janeiro but U.S. investors have not been so lucky since the markets opened on Monday. Gold fell on Monday to touch one-week lows and the Direxion Shares Exchange Traded Fund Trust suffered a bear hug. The reason for the weakness on Monday was the strong July jobs number and increased chatter about the likelihood that the Fed will raise interest rates.
It is no longer news that talks about an increase in interest rates have been having strong effects on the price of the yellow metal. When the market sentiment leans towards a rate hike, the price of the bullion tends to crash. However, investors tend to see gains in the yellow metal when the market sentiment leans towards maintaining the status quo on interest rates.
Bullion back on bullish horse after the dollar lost its footing
Many bullion bears had expected the downtrend in gold and Direxion Shares Exchange Traded Fund Trust to continue after the yellow metal broke down below a key support level at $1,335 an ounce on Monday. However, the bullion snapped out of the lethargy and Tuesday was a better day for bullion investors. On Tuesday, Spot gold maintained a 0.5% gain to $1,341.71 an ounce up from an intraday low of $1,330.03. Gold for December delivery gained $6.50 to $1,347.80 during the session.
One of the reasons behind the gains in the bullion yesterday was the weakness that the U.S. dollar suffered in the forex market. A glance as the FX markets revealed that the dollar fell lower against a basket of currencies because an increase in concerns about a gloomy economic outlook. Citigroup analyst David Wilson observed that “There is still a view that we could see a rate hike this year but there are enough risk issues out there to justify holding bullion,”
Interestingly, the gloomy global economic outlook has reduced the likelihood that the fed will be trigger happy to raise interest rates. The Fed Watch tool of the CME shows that the traders now see a 50-50 chance of a rate hike by December – the watch tool previously had a 30-70 chance of a rate hike.
Gold makes its way back London Metal Exchange after 30 Years in Exile
Another factor has been introduced into the current dynamic of the gold trade and Direxion Shares Exchange Traded Fund Trust will do well to take note. Gold has not been traded on the London Metal Exchange for the last 30 years but the yellow metal is making its way back to the exchange – a move that will make it easier for UK and EU investors to buy and sell the futures of the yellow metal.
The World Gold Council and the London Metal Exchange have started a new venture called LMEprecious. LMEprecious will provide centrally cleared gold and silver contracts to traders in the first six months of 2017 before it adds contracts for platinum and palladium. Aram Shishmanian an exec at WGC observed that it was important to start LMEprecious because “liquidity has dropped in London, to an extent that is unhealthy and to revive it is crucially important.”