Direxion Shares Exchange Traded Fund Trust (JNUG): Will Gold Rally in 2017?
A recent report from CNBC supported a strong gold price forecast for 2017. Noting that gold is already up 6 percent for 2017, the item discussed growing activity in gold futures contracts for Q2 2017. Specifically, one trader made a $1.5 million bet on the yellow metal. Why is the market anticipating a gold rally?
Traders Bet on Gold
On Wednesday, July 5, 2017, an unidentified trader purchased 35,000 contracts for a December 135/160 spread at $.42 per contract. That transaction, with the standard 100 shares per options contract, represented nearly a $1.5 million bet. To win on that position, gold would have to see more than a 16 percent bump before the contract expiration date in December of this year, closing above $135.42.
Other analysts, such as Mike Khouw of Optimize Advisors, observed that there has been strong movement into the exchange-traded fund GLD that tracks the price of gold. Buying has reportedly been double the average daily volume, building on momentum seen in Q1 and Q2 of the year.
4 Strong Reasons Why Gold Should Rally
What is the reasoning behind traders’ expectation of a gold rally? Examining what affects gold prices normally in the context of current events can help shed some light on the situation.
- Political Unrest– A number of ongoing issues are at play in creating more interest in risk-averse assets, such as gold. North Korean missile tests and cyber-attacks around the globe are just two of the geopolitical concerns that continue to make news headlines.
- Economic Instability – Recent economic reports from the U.S and China have raised concerns that the economic recovery is slowing or even showing signs of a full stall. This, tied with the historic levels of global debt, the continued use of monetary policy, and ongoing deficit spending, creates the potential for a truly significant economic downturn and even crisis.
- Technical Analysis – Some technical traders note that recent trends indicate that the prices for gold have consolidated, forecasting a significant movement upward. With the combination of buying signals for gold, continued historically low interest rates despite Fed rate increases, and rapidly increasing sell signals in the equities markets, the technical signs are pointing to a strong performance for gold in the markets.
- Weak Dollar – Many of the more respected analysts are watching the U.S. Dollar index closely and see it continuing on a downward trend. Noting the traditional inverse relationship between gold and the dollar index, these analysts feel this is another factor that will result in higher gold prices before the yearend. This expectation of a lower dollar is one of several reasons Anita Soni of Credit Suisse is also bullish on gold for 2017. She sees central banks taking a dovish stance in their response to troubling economic signals and raises the possibility of $1,400 gold before the end of the year. 3
Rising Gold Prices
These are some of the major factors that observers see driving the increased activity in gold and gold futures. Any number of potential political or economic disruptions in the U.S or globally could quickly send investors to gold, causing gold prices to rise—just as many futures traders expect them to.