Gold is starting the new week on a less than impressive note and the Direxion Shares Exchange Traded Fund Trust is not likely to fare any better. The yellow metal has been on strong rally with more than 25% year-to-date gains after almost three years in bear territory. Many investors have been bitten by the gold bug because of the relative stability that the bullion provides over stocks, ETFs, and other asset classes.
However, the bullish rally has started to slow down after economic data suggests that economy is not as weak as investors had thought. Last Friday, it was reported that the Bank of England made a surprise move to weaken the bullion by keeping its interest rate unchanged. Now, investors are starting to have doubts about the bullish prospects of the yellow metal and the bullion is down today.
Gold drops because of strong U.S. economic data
The Wall Street Journal reports that bullion has dropped to a two-week low this morning because of profit-taking activity from investors. This morning, gold for August delivery was down 0.81% to $1,326.96 an ounce to mark its lowest price since June 30. Interestingly, the Direxion Shares Exchange Traded Fund Trust seems to be defying expectations as it sports 1.17% gains to $154.78 in pre-market trading.
Analysts have observed that the weakness in the bullion was occasioned by an increase in the number of investors cashing out of their gold positions. The U.S. Commodity Futures Trading Data that was released last Friday shows that the volume of net long positions in the bullion was reduced by 5% to 259,100 contracts in the week ending July 12.
Analysts observed that the reduction in net long positions might cause the bears to have a stronger hold on the outlook of the bullion. More so, the fact that equities are rising even after a failed military coup in Turkey suggests that uncertainties has already been priced into equities and the bullion won’t be rising on volatility in the near term.
William Adams, director of research at FastMarkets observes that “I think there is risk of more profit-taking”. Analysts at Commerzbank also noted that “Stocks also appear to be becoming increasingly popular as an alternative investment opportunity again, as can be seen from the record highs achieved by the U.S. markets.”
Hedge fund managers reduce gold holdings
In a related development, Bloomberg reports that hedge fund managers and other speculators have started to reduce their bullion holdings. In fact, the investors are reducing their holding of physical gold as well as ETFs such as Direxion Shares Exchange Traded Fund Trust . The futures trade for the bullion in New York dropped by 2.3% last week to $1,327.40 an ounce to deviate from the bullish rally that led to six straight gains in the yellow metal.
Frances Hudson is a global thematic strategist at Standard Life Investments; his firm overseas about $373.3B investments. He noted that “Gold can take a step back and not have to perform the particular role as a safe haven.” He however noted that any decline in the bullion and the resultant rally in equities would be short lived. In his words, “Maybe equities are coming from a long way back and this is a chance for a rally, at least in the short term. That keeps gold in reserve, because the world isn’t falling off a cliff immediately.”