Gold is down to a two-week low but Direxion Shares Exchange Traded Fund Trust surprisingly held on to gains. On Thursday, the ETF ended the session with a 2.01% gain at $18.75 in contrast to the weakness in the bullion. However, the ETF is already feeling the pangs of the decline in the bullion and it has lost 1.33% to $18.50 in premarket trading this morning.
Gold lost its footing yesterday because investors panicked in response to potentially lower demand and the uncertainties in the Interest rate environment. Gold for December delivery declinedby 0.6% to end the session at $1,318 per ounce after it had earlier crashed to an intraday low of $1,312.10. Yesterday’s losses mark the sixth loss in seven sessions and it marks the lowest closing price in the last two weeks.
Here’s why gold crashed to a two-week low
The main reason behind the decline in gold prices and Direxion Shares Exchange Traded Fund Trust is investors’ reaction to the latest set of economic reports. On Thursday, the retail sales for August showed a disappointing trend with a 0.3% decline to seasonally adjusted $456.32 billion. The drop in August retail sales marks the first decline since March and it contrasts with the 0.1% gains recorded in July.
More so, the Consumer Price Index and Core CPI data are due this morning and economists think that the data will be less than impressive. If the data due today also shows disappointing weakness, the U.S. economy will have a hard time attaining the expected 3% GDP growth for the second half of this year. RSM chief economist Joseph Brusuelas observed that “Consumption is slowing in the current quarter which should diminish hopes of an above 3% rebound in overall growth.”
Interestingly, weakness in the economic outlook is weighing in on the interest rate environment and investors are not sure about how central bankers are likely to react to the weak macroeconomic trends. The Bank of Japan and U.S. Federal Reserve will hold their policy meetings next week.
U.S. Fed officials are divided about raising interest rates but it seems that the recent deluge of economic data might cause them to slow down their rate hike plans. However, the fed might decide to eat the frog and raise rates because of decent gains in the labor market.
Here’s what analysts think the future holds for the bullion
The outlook for gold and Direxion Shares Exchange Traded Fund Trust is murky and increased volatility is the likely order of the day, at least until the fed meets next week. Nonetheless, analysts have weighed in on how they expect the bullion to trade going forward. The prevailing sentiment is that the bullion still has upside potential ahead because of recent macroeconomic data suggests the U.S. dollar could trade lower to lift gold prices.
However, Carsten Fritsch a commodities analyst at Commerzbank says “gold is still showing a tendency towards weakness…[as] ultra-expansionary monetary policy still might look like the ultimate remedy to all economic problems, be it in the eurozone, the U.S., China or Japan.” The analysts also noted that, “the gold price will remain under pressure in the short term, partly because investor expectations are already very high and partly because financial market participants are not feeling any particular fear at present, which is why demand for gold as a ‘safe haven’ is tending to decline.”