As goes the gold market, so goes the increasingly popular Direxion Shares ETF (NUGT). Like most ETFs, trading for this fund is tied very closely to the performance of the gold price. Accordingly, it’s been an up-and-down week for NUGT. However, the fund looks to close the week on a strong note following a rally for the yellow metal.
The recent activity for NUGT is convincing evidence for how sensitive gold ETFs respond to fluctuations in the price of gold. This is even more true of gold mining companies, which are seen as high-risk, high-reward plays when the precious metals are on the rise. NUGT actually fits both of these categories, as the fund tracks the fate of a basket of gold mining stocks. Moreover, NUGT is a high-octane play because it is a leveraged ETF; it multiplies the actual ups and downs of the market by a factor of 3. This is why you’ll occasionally see its shares described as “3X Bull,” as in bullish on gold.
As is normally the case when prices are moving quite a bit, profit-taking and traders switching positions has created a commensurate amount of back-and-forth movement in NUGT. Following a considerable plunge for share prices on Tuesday, the ETF bounced back with a vengeance on Thursday, gaining an impressive 13.6% during the session. Again, this kind of volatility reveals how acutely changes in the underlying price of gold impact the value of mining companies in particular—and by extension the gold ETFs that track them.
Building upon Thursday’s fantastic positive momentum, NUGT rose another 2% in early morning trading on Friday. If this upward push continues, we could see share prices re-test their the recent 6-month high of $70 per share seen at the beginning of this week. This continued surge for NUGT comes in spite of the spot gold price pulling back slightly on Friday, just below the $1,270/oz range.
Factors Driving Gold
Two international developments helped lift gold this week as investor sentiment regarding bullion quickly recovered from their midweek dip. First, China released woeful export data that showed a 25% drop year-on-year in February. This is especially worrisome for an economy, the world’s second-largest, that is heavily reliant upon its leading role in exports and overseas trade.
Second, Thursday saw a bombshell from the European Central Bank (ECB) in the form of still more quantitative easing stimulus. The ECB chose to both raise its monthly asset purchases by €20 billion while also cutting its benchmark interest rate. This key rate was already in negative territory.
Despite this, many of the so-called “experts” are not sold on the success of gold so far this year. Dismissing the metal’s substantial 20% gains to begin the year—swiftly propelling gold into a technical bull market—Goldman Sachs is calling the rally a “premature surge” that is “only temporary.” As a certain Donald J. Trump might say, “Dopes!” Or, better yet, “Losers!” because that’s what investors who have been following this advice have been through the first 3+ months of 2016, especially if they’ve bought into stocks in lieu of gold.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.