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Is Gold Getting Ready to Bounce?

by: Frederic Ruffy September 05, 2008 | about stocks: GDX / GLD    

Frederic Ruffy

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Some players in the options market are showing surprising amounts of bullish sentiment towards gold, even as the yellow metal displays considerable downside momentum. Thursday, the yellow metal lost $5.00 and moved back towards $800.00 an ounce. Gold is now down 4.2 percent during the first three trading days of September and off 19 percent since July 15. Yet, despite the ongoing woes, not everyone seems to hold a bearish view on the precious. In fact, some options strategists were seen betting on a turnaround with substantial bullish spreads on the SPDR Gold Trust (GLD) and the Market Vectors Gold Fund (GDX) Thursday.

The SPDR Gold Trust saw bullish trading. The exchange-traded fund, which holds actual bullion stored in bank vaults, fell 50 cents to $78.39 a share. Like gold itself, GLD is down more than 19 percent since mid-July. Now, however, some seem to be positioning for a rebound with bullish spreads on the ETF.

Shortly after 11:00 Eastern time Thursday, an order for 15,000 of the GLD December 80 calls traded on the offer or for $4.17 a contract on the ISE. At the same time, 15,000 of the December 94 calls traded bidside for 92 cents. With the GLD sitting near $78.00, the trading activity has all of the characteristics of a bullish call spread. If so, the strategist in question is positioning for a rebound and willing to pay a debit of $3.25 to enter the spread. The upside breakeven (at expiration) is consequently $83.25 with a profit potential of $10.75 (per spread) should GLD rally back up to $94.00 a share by December options expiration, which would equate to roughly $940 an ounce for the precious metal itself.


Figure 1: GLD Bull Call Spread

The Market Vectors Gold ETF saw similar bullish trading. Rather than holding the precious metal itself, GDX holds shares of Newmont (NEM), Barrick Gold (ABX) and 29 other mining companies. It tends to move in a fashion similar to the price of gold, but not exactly. For example, Thursday, GDX slid $1.39 to $32.18 a share and to its lowest levels since June 2006. The fund suffered a 37.9 percent swoon since July 15.

Yet, despite the ongoing slide in the Market Vectors Gold fund, some bullish traders surfaced Thursday. Again the focus was on the December contracts. In this case, with GDX trading for $32.40 at 15:45, a block of 8,156 December 33 calls traded offerside for $3.35 and 8,173 of the 43s traded on the bid for 70 cents. The trade was repeated several times until volume in both contracts topped 20,000 contracts. Again, the strategy appears to be bullish spread trading, where the investor in question is buying calls with the lower strike price and selling calls with a higher strike. In this case, the strategist might be willing to pay $2.65 per spread and has a potential payoff of $7.35 should the Market Vectors Gold fund rally to $43 a share or greater by December options expiration (106 days).  


Figure 2: GDX Bull Call Spread

Stock position: None.

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This article has 7 comments:

  •  
    Sep 05 09:02 AM
    Friday Sept 5, 2008 ET: 08:58

    Looks like we forecasted over the last couple of days, the Dollar and gold are flipped on a dime. The Dollar Index was going up too fast and too much and the sentiment on Gold really started to be negative. Apperently, the markets are "back to reality"!
    Reply
  •  
    Sep 05 02:45 PM
    Tell that to the silver market. The manipulation in silver is getting so blatant its stupid. Its tad amount to a guy walking into a room full of people and shooting someone then walking calmly out of the room.

    Several distributors I know are taking delivery of 1000 oz bars and making their own 100 bars. I know one supplier that purchased millions of dollars in American and Canadian gold and silver coins.....FROM EUROPE. Because there is no supply here. But yet the NYMEX says there is plenty.....because silver got killed again today.

    (poof) - as I blow smoke from the barrel of my gun while everyone watched me do it........
    Reply
  •  
    Sep 05 04:02 PM
    @Lionheart: "Its tad amount to a guy...." I think you mean "tantamount."...
    Reply
  •  
    Sep 05 04:08 PM
    Yes thank you. I don't think I have every used tantamount in a sentence before :-)
    Reply
  •  
    Sep 06 10:06 AM
    One might say, on a comparative basis at least, that GLD has ALREADY bounced. The price ratio of GLD shares versus GDX shares hit a record high 2.4-to-1 this week.

    That's certainly not what option guru Larry McMillan wanted when he recently recommended a December spread pitting long GDX calls against long GLD puts (details of the trade are outlined in the Hard Assets Investor artcile "Options As A Golden Opportunity," (www.hardassetsinvestor...).

    At last look, the spread was bid at $12.50, down from the $16 limit Larry proposed as a buy point.

    There's still, time, of course, for the spread to work out. The options expire December 19.
    Reply
  •  
    Sep 07 07:55 AM
    One would think that the Fan/Fred bailout will be bullish for gold.The dollar should weaken..
    Reply
  •  
    Sep 07 12:50 PM
    If anything is decoupling from the dollar, it's metals. The fundamentals are telling us metals are going to be the only reliable investment vehicle in the future and watch as central banks scramble to stockpile more gold in the coming decades as their populations and problems mount and paper and promises become worthless. The dollar should remain the global bull currency until the majority of the nation becomes welfare dependent - which if you look at census demographic changes and population projections, "the proof is in the pudding." The USA is in a slow morph into society far from what made it great in the world. We've gone from sleeping with your doors unlocked to sleeping with a shotgun under your bed and metal cages around your windows thanks to bleeding heart policies and a lack of "balls" from the likes of Joe Biden and Bill Clinton to say what's really on their minds for fear of upsetting the soon to be majority voting bloc in America. It's a shame that the same thing is happening across Europe and Russia, populations of highly productive, civilized segments of society are plummeting as the wealth is distributed (welfare) to support the burgeoning minority populations. Go rent the movie "Idiocracy" if you haven't already seen it for an idea of what the world will look like at the rate we are going.
    Reply
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