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Investors Think Twice about Gold and Direxion Shares Exchange Traded Fund Trust (NUGT)

Gold Bars - Square NUGT - Gold Price

Gold ended Thursday’s session with gains but investors in the Direxion Shares Exchange Traded Fund Trust  did not record gains and the ETF ended the session with losses.  Gold prices recorded a spike after the Federal Reserve released the minutes of its policy meeting and the bullion rose to its highest level in electronic trading in the later part of Wednesday.

Direxion Shares Exchange Traded Fund Trust (NUGT) Gold

In the policy statement, the fed confirmed expectations that it won’t raise interest rates in July. The fed however left the door open on the prospects of raising interest rates later in the year – Wall Street thinks that the smart money is on a September rate hike.

Economic data doesn’t support a rate hike

The yellow metal maintained the gains on Thursday and gold for December delivery gained a decent 0.5% to settle at $1,341.20 an ounce. Thursday’s closing marks the highest closing price in the yellow metal since July 13. However, the Direxion Shares Exchange Traded Fund Trust lost 0.26% during the session to end at $148.41. The ETF has lost another 0.69% in after-hours trading and it might open today’s session around $147.

In a note to investors, Edward Meir, independent commodity consultant at INTL FCStone observed that the reaction of the market after the Fed policy statement was irrational. In his words, “we can only suspect that the tone of the Fed statement may have led the market to believe that once the next rate move was out of the way (and not until December, with September coming a close second), the Fed may be done for awhile as it assesses how the economy is responding its moves.”

However, an objective look at the economic landscape in the United States suggests that the Fed is right to err on the side of caution about the timing of the rate hike. For instance, the durable goods order in June recorded a 4% decline to make the biggest drop in almost two years. More so, the jobless-claim data in July showed that those applying for unemployment benefits last week increased by 14,000 to 266,000.

The unimpressive economic outlook is one of the reasons the Fed is delaying the rate hike. Interestingly, David Beahm, CEO of Blanchard and Company observes that “the Fed is most likely to stand pat on interest-rate hikes until at least its December meeting, and most likely beyond.”

Don’t follow the bullish rally in gold blindly

Gold has gained 20.48% in the year-to-date period and the Direxion Shares Exchange Traded Fund Trust has gained 331.4% in the same period. However, investors might want to think twice before chasing the rally in gold because the rally might have already peaked after it made 25% YTD gains in May.

To start with, the bullion doesn’t always maintain its high prices in relation to other assets. For instance, the bullion touched almost $1,900 an ounce in 2011 but it currently trades around $1,315 or 30% lower than that 2011 high. In contrast, the S&P 500 is about 80% higher in the same period.  Zack Shepard, VP at Matson Money told USA Today that “Gold has historically been a dramatically worse long-term investment than stocks…  After you factor in taxes and commissions for gold, you are looking at an abysmal long-term investment.”

 

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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