According to research conducted by CNBC, “The trader purchased 10,000 July 125-strike calls for $2.29. Since each call option accounts for 100 shares, this a $2 million bet that the GLD will rise above $127.30 by July expiration.”
That’s about as bullish as it gets!
In other words, this big-volume trader is wagering $2 million that the gold price (and therefore GLD) will advance by about 10% over the next 6 weeks or so. The huge bet was apparently made on Thursday. Because it is an options trade, the trader stands to potentially lose 100% of the total if prices actually decline over that period.
It goes to show that the paper gold markets are more useful for aggressive traders who have a large risk appetite, while the long-term savers and people looking to protect their wealth stick with physical gold.
Following the Headwinds
GLD has indeed been a strong performer so far this year. The fund has jumped 20% from its low this past December. It was trading above $120 per share on Monday afternoon.
There are a wide variety of reasons gold has become more attractive to investors over the course of 2016. First and foremost has been the extremely low levels of both nominal and real interest rates. While nearly one-third (30%) of nominal sovereign debt is paying out negative yields, the real interest rates for over half (51%) of the world’s debt is in negative territory right now.
The World Gold Council (WGC) indicates that during periods of low rates—and we’ve never seen them quite this low—gold prices tend to double their average performance. Lately, the U.S. Federal Reserve has backed off of its intended pace of interest rate hikes, as well. Yet, even if the Fed decides to tighten monetary policy at some point this year, the global landscape will still be littered with subzero interest rates.
Another big influence is the dismal expected earnings for U.S. corporations. Earnings season is right around the corner, when companies will be reporting their first-quarter profits. If corporate earnings are as bad as projected, it will be the worst quarterly earnings for U.S. companies since 2009, which was still just in the wake of the financial crisis.
The abysmal earnings and negative interest-rate environment undoubtedly boost gold’s attractiveness. Moreover, the rising investor demand for precious metals is occurring at the same time as industry and manufacturing are slowing. While gold and silver have surged, copper and crude oil have gone the opposite direction. Thus, the precious metals are outperforming the commodities sector as a whole.
Many different signals point in the direction of an increasingly strong gold market. With scarcely any signs of improvement for the global economic outlook, it stands to reason that gold would follow up its fantastic performance in Q1 with more gains to come, even if they are slightly less intense. Nonetheless, the bet that GLD will appreciate another 10% before July is rather bold no matter how you slice it. Of course, for investors who want a safer avenue for storing their wealth and hedging against the continued downturn of the financial markets, physical gold and silver bullion are always a simple, effective option.
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.