Gold investors should prepare for another week of losses and the Direxion Shares Exchange Traded Fund Trust won’t be spared. The bullion lost its footing in Asia last Thursday and last Friday turned out to be a depressing day for bullion investors globally. The fundamental factors that weakened the bullion include a profit-taking selloff, rally in equities, and uncertainties in the interest rate environment.
The yellow metal closed with 0.43% losses at $1,317.43 an ounce last week on Friday to mark a 0.68% weekly loss. The Direxion Shares Exchange Traded Fund Trust was down 0.67% to end the week at $136.13 to record a 12% weekly decline. This morning in Asia, gold fell from its previous highs as its first straight weekly decline since May continues.
Gold is suffering in the hands of Asian bears
Asian bears are being emboldened by the weakness in gold prices last Friday and they are mauling the yellow metal this morning with alarming alacrity. This morning, spot gold had lost 0.7% to $1,313.57 an ounce as early as 10:48AM in Singapore – the loss is expected to increase as the trading day progresses. More so, bullion for August delivery was down 0.5% to $1,317.50 an ounce.
The weakness in the price of the yellow metal in Asia is an equal and opposite reaction to the strong rally that Asian stocks have started to record. This morning, Asian shares were soaring towards nine-month highs as China’s Shanghai gains 0.10%. Asian stocks have started to rally because the fears about the impact of Brexit have started to wane.
A similar cause of the weakness in the bullion is that U.S equities are also enjoying bullish tailwinds in response to the strong dollar and impressive economic data. Vyanne Lai, an economist at National Australia Bank told Bloomberg that “Market expectations of the Fed raising interest rates by the end of this year have increased significantly over the last two weeks, and it is likely that the Fed could be conveying a more optimistic message about the U.S. economy.
Current weakness in gold could trigger another rally
The price of gold and the Direxion Shares Exchange Traded Fund Trust are likely to remain subdued this week because of the rally in equities. However, it is still a little too early to make a verdict about where the yellow metal is heading. The U.S. Federal Reserve and Bank of Japan policymakers will be holding separate meetings this week and the outcome of their meetings could have a significant effect on how the bullion fares in the market.
Interestingly, the prevailing market sentiment is that the central banks are likely to err on the side of caution about their decision on interest rates. It is obvious that central bankers will want the dust on Brexit to settle before they startle the market with a sudden change to the interest rate environment. In fact, the odds that the fed will interest rates when it meets on July 26-27 are currently at 10%. In contrast, the odds that the fed might wait until December before it raises interest rates have soared from 12% to 45%.
If central bankers act true to expectations, the bullion should still benefit from the low interest rate environment for the next couple of months. You should not be surprised if investors decide to use the current weakness in gold prices as an opportunity to buy the bullion at a discount to its fair market price.