Gold and Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) have had an impressively bullish run this year. The yellow metal has booked year-to-date gains of 25.55% and the ETF has gained 275% in the same period. The main reason behind the bullish ascent in the yellow metal is the increased volatility in the market occasioned by uncertain economic and geopolitical tensions. However, analysts are starting to conclude that the safe-haven rally in gold is nearing an end.
In the last couple of months, the yellow metal has been trading in a narrow range in response chatter that the U.S. Federal Reserve will soon raise Interest rates. The recent deluge of economic data has encouraged the fed to consider increasing interest rates. The possibility that the fed might be encouraged to raise interest rates suggests that the economy has improved and investors have fewer reasons to seek refuge in gold.
RBC says gold’s safe-haven rally is over
Gold and Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) have enjoyed bullish tailwinds in response to fears of how the Brexit vote could affect the global economy. However, Christopher Louney, a commodity Strategist at RBC Capital Markets observed that investors’ fears have started to wane.
While speaking on CNBC’s Futures Now, he noted that the 25% rally in gold was justified because of market fears. In his words, “we had Brexit, we had uncertainty, we had volatility, we had very low yields, we had so many things going on in the markets that were in gold’s favor.”
He however, observed that the market is no longer fearful because the “hike is already priced into gold. We certainly could get ten bucks, maybe 15 bucks, maybe 20 bucks, but we are not going to retest the $1365 high that we saw earlier this year.” The analysts further noted that the bullion has a huge downside risk from here. In their words, “our full-year average is $1258 for 2016 “that’s admittedly the unpopular view of the market right now. But we really do see downside from here.”
Funds are exiting their positions in gold
If you have an exposure to gold or ETFs such as Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT), you might want to exercise patience in taking up bullish positions. Speculations that the Fed might go ahead to raise interest rates after its policy meeting this week is already pushing hedge funds to exit their bullish positions in the yellow metal. In August, hedge fund holdings in bullion backed ETFs have dropped to mark the largest decline since May.
It was reported that net-long position in gold futures and options fell 11% to 248,858 contracts for the week ended Sept. 13. Data from the Commodity Futures Trading showed that the holdings were 278,994 in the previous week to mark the highest since July 5. Hence, it is obvious that hedge funds are cashing out of gold ahead of the Fed policy meeting.
Quincy Krosby, a market strategist at Prudential Financial observes that the fed is “going to have to eventually raise rates and acknowledge that inflationary pressures have been rising.” Hence, it is logical that fund managers take profits off the table in order to hedge risks ahead of a potential rate hike.