Direxion Shares Exchange Traded Fund Trust is caught in a terrible storm now and gold has started a bearish retreat that could force bulls to have second thoughts. Today, the yellow metal is on track to record its biggest weekly decline in the last nine weeks. The main factor behind the hasty retreat in the bullion is the increased expectations that the U.S. Federal Reserve might raise interest rates next month.
This morning in Europe, spot gold was trading around $1,221.45 an ounce after it had earlier touched a session low of $1,211.30. Bullion for June delivery was flat at $1,221 and the yellow metal has lost 2.5% this week to mark the biggest weekly decline since March 25. Brian Lan, managing director at Singapore-based GoldSilver Central notes that “Gold is not an interest-bearing asset so that is the reason a majority (traders) might want to wait on the sidelines, or, even move out of gold at the moment,”
Gold investors set their gaze on the Feds
Investors in the Direxion Shares Exchange Traded Fund Trust will agree that May has been the month of the bears. The ETF has lost more than 7% in the last one month and the yellow metal is down 5% this month. Unless something drastically bullish happens next week on Monday or Tuesday, the yellow metal will end May with the biggest monthly loss since November 2015.
Precious metals started the year on an impressive note with gold emerging as the best performing asset in the first quarter. More so, precious metals have generally outperformed equities in the first quarter of the year. However, data compiled by Bloomberg indicates that precious metals are starting to lose their shine in the second quarter. To start with, In China, bullion of 99.99 percent purity dropped 0.7% to 258.13 yuan a gram ($1,224.39 an ounce) on the Shanghai Gold Exchange. More so, Silver has declined by lost 0.4% as it heads out to mark its fourth weekly drop.
The smart money in on gold for the long term
Despite the recent weakness in gold, some analysts think that it might be wise to stay on the sidelines of gold and the Direxion Shares Exchange Traded Fund Trust until the volatility ends. The fact that European Central Banks has warmed up to the idea of negative interest rates seems to be a bullish driver for the bullion in Europe. Some fed officials have also toyed with the idea of negative interest rates and it wouldn’t be surprising to see central banks in Asia adopt negative interest rates as well.
Alan Gayle, a senior strategist for Atlanta-based RidgeWorth Investments notes that “When you have to pay to have your money stored, all of a sudden it makes sense to own gold, because even though the metal doesn’t pay you anything, at least you don’t have to pay,”
More so, Jordan Eliseo, Sydney-based chief economist at trader Australian Bullion Co noted that gold is down but that the fundamentals still support a bullish thesis. In his words, “Gold could test $1,200, a scenario that will grow more likely if the market consensus around Fed tightening builds… “Whilst traders could trade the short side, for a medium-term investor, we’d buy into this correction.” To buttress the smartness of the long call to buy gold for the long term, data compiled by Bloomberg revealed that “holdings in gold-backed ETFs funds were up 1.5 metric tons to 1,844.9 tons as of Thursday.”