By Ben Cross
After hitting a fresh two-year high of nearly $1,365 per ounce yesterday on high volume of over 25 million ounces, gold futures have retreated a bit. It's just a short hiccup on the way to $1,400.
As a gold bull, I am hoping for a broader pullback but doubt it will come. I have macro and micro reasons for this belief. The micro is the daily inflow of investment into the global gold ETFs. The gold ETFs have now surpassed 2,000 tons (64,000,000 ounces) with this week's inflow of 1,720,000 ounces. The GLD SPDR ETF (GLD) lead the inflow over 1 million ounces on Tuesday alone and now accounts for half of the global total. But, ETF securities, Source ETF, Canada's central gold fund, Swiss ZKB and the IAU ETF are all attracting inflows. The global ETFs would now be considered to have the fifth largest gold reserve holding behind the U.S., Germany, France and Italy. China which raised its holdings to 1,828 tons last month would still be lagging. Option activity on the ETFs has also been increasing with the GLD ETF getting more large tranche transactions than gold futures options both on speculative bets as well as traditional equity players buying the underlying and selling calls against it to gain a rate of return. With the disappearance of commodity risk takers from the banking sector, the front three months of the GLD ETF alone accounts for more option volume than the Comex. The silver ETF is also starting to gain traction on the back of gold as it saw an inflow of 5.2 million ounces yesterday which is the most since March.
Also, on the micro side we are starting to see more exotic type of bets from hedge funds trying to get more leverage payouts while spending less premium. An example is a knock out call struck at $1,400 which is changing hands at $9. One speculator bought this with a knock out at $1,330 and it cut the premium by 50% to $4.5. So they are making a bet that on the July 26 expiration gold will be above $1,404.50 ($1,400 strike +$4.5 premium) without breaching $1,330 first. If gold does fall below $1,330 at any time before expiration (which I think is very possible), then they lose their entire premium. One other fund which is already very bullish on gold made a bet that gold would trade above $1,500 by year end. He was given a 4-to-1 payout on this bet so for every $1,000 that he invested he will get $4,000 if gold trades $1500 anytime between now and year end. I recommend that only the most sophisticated option investor look at these but I used them as an example to show that more hedge funds are looking for leveraged upside in gold.