Gold has had a rocky summer, as the yellow metal plunged in May and June, reaching its low for the year. However, to start July, the metal has taken off and has produced solid gains on the back of rising tensions and a sluggish dollar.
This apparently wasn’t meant to last though, as gold has faced some weakness in recent trading sessions. Declining risks in Syria are dulling the appeal of gold from a safe haven perspective, while it also appears as if traders are starting to accept the idea of the Fed taper beginning.
After all, worries over a war in the Middle East aren’t much of an excuse for the Fed anymore, while the U.S. economy is increasingly back on track. The most recent jobless claim figures came in well below the consensus, pushing the 4-week moving average ever closer to the key 300,000 mark (though a technical problem may be responsible for magnitude of the decline).
Given this continued traction on the jobs front, as well as the cooling tensions in the Middle East, many seem to be betting on a modest taper from the Fed at the upcoming policy meeting. This is viewed as terrible news for safe haven investments like gold, pushing many to take a negative view on the metal in the short-term (read Time to Buy the Covered Call Silver and Gold ETFs?).
“Today’s data is another nail on the coffin, and people expect the announcement on tapering to come next week,” Frank McGhee, the head dealer at Integrated Brokerage Services LLC in Chicago, said in a telephone interview for a Bloomberg article. “People are getting bearish about gold.”
This news pushed down all of the top gold ETFs—(GLD - ETF report), (IAU - ETF report), and (SGOL - ETF report)—about 2.4% on the session. Volume was only slightly above average to start the day, while the trend downward for the precious metal space extended the losses for gold ETFs to about 6% over the past ten days.
Meanwhile, investors also saw some weakness in the gold mining space as well. Products in this category tend to trade as leveraged plays on gold, so when the yellow metal is sliding they can be especially impacted.
This was the case once again in Thursday trading, as the top gold mining ETF the Market Vectors Gold Miners ETF (GDX - ETF report), lost about 3.5% to open up the session, while the junior product—(GDXJ - ETF report)—declined by 4.7%. Now, GDX is down about 8.7% in the past ten days, while GDXJ has declined by 11.7%, squashing any hopes of a gold rally (See Gold Mining ETF Investing 101).
Although there was a technical problem with the jobless claims—which could impact the actual figure—the trend is still in the right direction. Cleary the economy is slowly moving ahead, and other data points—such as strong car sales and a decent ISM Manufacturing reading—suggest that strength is building in the U.S. economy (see 3 Small Cap Value ETFs Poised to Outperform).
Add this in to a less risky geopolitical environment, and many are starting to bet on a modest taper coming from the Fed at their next policy meeting. This type of situation is very bearish for gold, so look for precious metal ETFs, and their mining cousins, to face some short term trouble so long as demand stays low for this traditional safe haven.
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