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Rate Rout Hits Gold, Direxion Shares Exchange Traded Fund Trust (NYSEARCA:NUGT)

Gold NUGT

Direxion Shares Exchange Traded Fund Trust has been soaring lately on rumors that the Federal Reserve might not go ahead with a September rate hike. However, it appears that the previous reality of a rate hike will set as news emerged over the weekend that the Fed will go ahead with its plan to raise interest rates. Stanley Fischer, Vice Chairmen of the fed gave this hint while he was on a panel at the Kansas City Fed’s Economic Symposium in Jackson Hole, Wyoming.

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Fischer believes that 2% inflation is not needed before the fed goes ahead with its plan to raise interest rates. In his words, “Given the apparent stability of inflation expectations, there is good reason to believe that inflation will move higher as the forces holding down inflation dissipate further”.

He also takes a different view in saying that low inflation provides a chance to make a gradual increase in interest rates. In his words, “with inflation low, we can probably remove accommodation at a gradual pace… we should not wait until inflation is back to 2% to begin tightening.”

Analysts seem to agree that a rake hike is imminent

Some analysts seem to agree with Fischer on the need for the fed to raise interest rates in next month. Chris Rupkey of Bank of Tokyo-Mitsubishi says that Fischer might push for a September rate hike and have it, given his position on the fed. Rupkey says, “The breaking news is that Fischer says the Fed should not wait until inflation hits 2% to begin tightening… That sounds like a Green light to us… Not for nothing, he is the only one of the Fed members who has actually run a central bank.”

The outgoing president of the Federal Reserve Bank of Minneapolis is against a September rate hike but he agrees that the Fed is bet on raising rates. He says, “low interest rates have given the Fed less “monetary policy ‘space’ and it will prompt them to raise rates sooner and higher than is desirable”.

Another analyst, Jack McIntyre at Brandywine Global confirms the high chances of a rate hike next month – the market knows that an increase in interest rates is bad for gold ETFs such as Direxion Shares Exchange Traded Fund Trust .

He says, “Yes, the [Fed would] like to remove emergency-level monetary stimulus to build up ammunition for the next slowdown in the U.S. economy… It would be a net positive to move us off of zero interest rates to build up some ammunition so they can cut them when it slows down.” 

Rate hike is not good for the Direxion Shares Exchange Traded Fund Trust

The Direxion Shares Exchange Traded Fund Trust opened lower today losing all the gains that it had in after-hours trading last Friday. As at 9:41AM EDT, the Direxion Shares Exchange Traded Fund Trust was down 9.06% to $3.11.

The decline in the EFT today echoes the sentiment that an increase in interest rates will reduce the allure of commodities such as gold. Late in July, the takes about the Fed policy on interest rates rocked the boat for gold ETFs, it appears that a similar situation is playing out as August ends today.

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Victor Alagbe is a seasoned business and finance writer with a specialty in writing about how to invest for the long-term in healthcare, pharmacology, energy and tech stocks. His long-term focus is on stocks that provide a nice mix of growth and income. For the short term, he passionately writes about trading stock options for the excitement and leverage that stock options offer.

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