How Gold Can Get Its Grove Back

By Tom LydonElectionFOXBusiness

Gold has plunged in response to a Donald Trump presidency, with a strengthening U.S. dollar and rising expectations of a Federal Reserve rate hike weighing on precious metal prices. However, exchange traded fund investors are betting on a swift turn in the metals market.

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Over the past week as Comex gold futures declined 3.9% to $1,216.6 per ounce, the Direxion Daily Gold Miners Bull 3X Shares (NYSEArca: NUGT) saw $198.7 million in net inflows, the Direxion Daily Junior Gold Miners Index Bull 3X Shares (NYSEArca: JNUG) experienced $112.3 million in inflows and the popular VanEck Vectors Gold Miners ETF (NYSEArca: GDX) added $115.2 million, according to XTF data. The flows suggest that some aggressive traders are expecting a turnaround in the gold market after the recent selloff.

Gold prices weakened since the November 8 election as traders anticipated President-elect Trump would enact fiscal stimulus measures, which would in turn fuel economic growth and inflationary pressures, and the Federal Reserve would hike interest rates in response to the rising inflation expectations to head off a potentially overheating economy.

With the sell-off in precious metals beginning to lose momentum, market observers are coming to terms with an eventual rate hike ahead and could be calming down after the initial plunge. The markets may be almost fully priced in to the fact that the Fed will raise rates 25 basis points in December and the initial shock of Trump's presidential election win starts to fade - as a physical asset, gold pays investors nothing, so the investment struggles to compete with yield-bearing assets like Treasuries when borrowing costs rise.

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The initial knee-jerk reaction from the rise in yields and strength in the U.S. dollar is petering out, which could mean that the sell-off or overreaction in the gold market could also be coming to an end.

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Nevertheless, gold assets may have further room to fall if the U.S. dollar and real bond yields continue to rise.

Investors seeking gold exposure have turned to gold miners as their go-to play this year after years of underperformance in the mining sector produced attractive valuations. Despite the recent falloff in gold producers, GDX still increased 29.1%, NUGT gained 71.4% and JNUG advanced 145.1% year-to-date.

GDX is comprised of global gold miners, with a notable tilt toward Canadian and U.S. mining companies. NUGT tries to reflect the 300% daily performance of the same underlying index as GDX while JNUG takes the 300 daily performance of mid- and small-cap companies.

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