Morgan Stanley (NYSE:MS) $800 Gold Call Sends Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) Lower

Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT) falls

Morgan Stanley thinks that there’s real problems in the gold market, and the Direxion Shares Exchange Traded Fund Trust  is suffering as a result on Friday. The firm’s analyst in charge of the metal, Tom Price, reckons that gold could hit as low as $800 if market conditions follow his bear thesis.

Market Vectors Gold Miners ETF

Mr. Price warned that the current price falls in gold have little to do with China’s reveal of lower than thought gold-buying. That’s just an even that has helped the price of the metal on its way lower he says. “Price stability in Precious Metals has ended” he says because of the passing risk of deflation, and the coming rise of interest rates in the US.

Price says gold heading lower

The Direxion Shares Exchange Traded Fund Trust   hit a new low of $3.06 today as the price of the yellow metal continues to sink. The ETF has lost more than 70 percent of its value over the last three months, and has now lost more than 99 percent of its value since it was created at the end of 2010.

Mr. Prices says that “the PBoC’s announcement last week, about China’s surprisingly low official gold holdings, was really just the latest in a string of bearish events.” The real problems are in gold selling to cover losses in China’s bloated stock market, and traders getting out of the metal as they look forward to losses on the back of a US rate rise in 2015.

The worst case scenario, says the Morgan Stanley team, is for gold to fall to around $800 per ounce. His middle view is that the price of the metal will end up at around $1050 per ounce.

China liquidity risk rocks gold

As the market opened in China on Friday morning a new flash crash in the price of gold was seen. The price of gold fell from a recovered position of more than $1100 per ounce early this morning back down to the lowest levels in five years as Chinese traders sold their positions in the metal.

The reason for this selling isn’t quite clear, but on theory is becoming more and more popular. If Chinese traders have been using Contracts for Difference to trade the stock market, they may have lost more than they invested.

Contracts for Difference work in a way close to the Direxion Shares Exchange Traded Fund Trust . They magnify the losses and gains in stocks using leverage. In a contract for difference, however, an investor can lose much more than invest.

In order to exit their position they have to buy themselves out, and that may mean liquidating another position. Traders in China may be selling their gold in order to cover huge losses in the stock market crash that has gripped the country over the last few weeks.

Scotiabank’s Guy Haselmannsays that China’s collapse is at the root of the drop across commodity markets. The analyst wrote, in a recent report, that “weakening demand from China is accelerating the decent in most commodities.  Budgets of EM supplier-countries and commodity exporters are being materially impacted.”

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