Options Traders Are Betting on More Pain for Gold Prices

By Joe Deaux

Investors are betting that the worst isn’t over for gold after prices erased this year’s gains.
The most-traded bullion option on the Comex in New York today was a put giving owners the right to sell futures for December delivery at $1,100 an ounce, a wager that would mean an almost 8 percent drop from current prices.
The metal slumped to the lowest since December today after gains for U.S. payrolls payrolls sent the dollar to a four-year high and stoked concern that the Federal Reserve will move closer to raising interest rates, limiting the risk of
inflation. More than $3.9 billion has been erased from the value of exchange-traded products backed by gold this year, and money managers are holding their smallest bullish bet since January.
“There are a lot of headwinds for gold prices right now, because it’s hard to find any inflation, and the dollar has been so strong,” said Walter “Bucky” Hellwig, who helps manage $17 billion at BB&T Wealth Management in Birmingham, Alabama. “In the domestic and global economy today, if you had a checklist of things that might make gold prices go higher, its hard to find anything that might check the box.”
An estimated 5,973 lots of the $1,100 December gold put changed hands today, according to the latest data from the bourse. Each contract is for 100 ounces.
The contract jumped 56 percent today to $6.70, the biggest gain since April 2013. A December $1,125 put was the next most-traded option today, and also climbed by the most in more than a year.

Price ‘Magnet’

Today’s options trading signals that “there’s a large bet that prices will go lower,” George Gero, a New York-based precious-metals strategist at RBC Capital Markets LLC, said in a telephone interview. “The puts are like a magnet drawing prices down to that area.”
Futures for December delivery dropped 1.8 percent to settle at $1,192.90 an ounce on the Comex in New York, after touching $1,190.30, the lowest since Dec. 31.
Gold has fallen out of favor as U.S. equities reached a record last month, the dollar surged and inflation remained low. Holdings in global ETPs are at the lowest in five years, and open interest in Comex futures and options is near the lowest since 2009. Prices tumbled 28 percent last year, the biggest annual loss in three decades, as some investors lost faith in the metal as a store of value.
Bullion climbed 70 percent from December 2008 to June 2011 as the Fed bought debt and held borrowing costs near zero percent, boosting inflation concerns. Prices touched a six-month high in March after Russia annexed the Crimean peninsula.

Job Gains

An accelerating U.S. economy means investors are shunning gold even after the government expanded sanctions against Russia and ramped up its military campaign to combat Islamic State in Iraq. Rising interest rates reduce the metal’s allure because bullion generally only offers investors returns through price gains, while a stronger dollar typically cuts demand for a store of value.
The U.S. jobless rate declined to a six-year low of 5.9 percent in September and employers added more workers than projected, government data showed today.
“The strong jobs report means the market is interpreting it as that the Fed will probably follow through with raising short-term rates sometime next year,” Hellwig of BB&T said. “That’s the opposite of what you need for gold prices to go higher.”