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In
November 2005 I predicted the mega-move in gold up to $720/oz by noticing a
very
large build-up of call options in the HUI component shares
(http://www.marketforceanalysis.com/Pubished%20Articles/assets/Explosive%20
Rise%20in%20Gold%20Mining%20Shares%20Coming.pdf)
I have
now noticed a very interesting similar massive build-up of call options in
the
October and December COMEX gold contracts.
Figure 1
shows the cumulative Open Interest across all strike prices for the Call
positions
and the Put positions for October. If you look at the blue line it tells you
that if
the POG increases to, say, $850/oz then approximately 40,000 call options
in total
would be “in-the-money”. Looking at the red line it tells you
that if the price
of gold
were to drop to $625 then approximately 20,000 put options would be “inthe-
money”
etc.
 
Notice
that the blue line (calls) flattens at around 42,000 contracts whereas the
redline
(Puts) flattens at 26,000 contracts. This tells us that there are 1.6 times
as
many bets
that gold will rise rather than fall. Where the curves are not flat two
distinct
slopes can be identified as shown by the two different dotted lines labeled
1 &
2. The blue dotted line (1) is very steep indicating that speculators are
prepared
to bet heavily on the gold price increasing up to at least $740. The
second
slope (2) is much lower indicating that speculators are less keen to bet
on the
POG rising above $740 by October. On the Red curve the dotted line (1)
indicates
a willingness by the bears to bet on a POG decline to around $625 but
the lower
sloping line (2) indicates there is much less enthusiasm below tto bet
on the
POG falling much below that. The bulls betting on POG $740 outnumber
the Bears
betting on POG $625 by almost 2 to 1.
In figure
2 the same chart is shown for December 2007. Notice that the total
open
interest for the calls across all strike prices is 122,000 contracts! This is
almost 3
times the level of October. The total PUT OI has also risen to 63,000
contracts
which is 2.5 times the October level.
The bets
by bulls outnumber those by the bears by a 2 to 1 ratio. There are again
two dashed
lines in red. The red dashed line (1) is a higher slope than the redline
(2)
suggesting bears are not enthusiastic about betting gold will fall below
$600.
Look at
the bull dotted line (1). There is only one slope! This suggests
speculators
are not backing away from betting on a rising gold price even above
$1100 by
December! This is phenomenal. The open interest in play on the Call
side is a
staggering 12 million ozs. That is almost 25% of the worldwide annual
mine
output! While many options are settled in cash there is always the
possibility
of a significant proportion being exercised for futures contracts or gold
bullion.
The shear
size of the call position and the eagerness to speculate with equal
propensity
for small rises in the gold price as for very large ones is truly
astonishing
and should be taken very seriously.
Just as
in my prediction in 2005 I consider option players highly sophisticated
speculators.
Such large and widely spread positions are not contrarian indicators.
These
positions are also corresponding to the seasonal high demand for bullion
which in
itself is a positive indicator not a contrarian one.
I
conclude that smart money is being placed for a massive rise in the gold
price.
This
money could not go in to the futures market without blowing the lid off the
price as
it would represent a 33% increase in open interest. Going into the
option
market allows flying
below the radar…except that I picked them up on mine!
Adrian Douglas
Marketforceanalys.com
Adrian Douglas writes many articles
on his observations and analysis on financial markets, gold and silver
markets, and some selected company stocks. The articles were all initially
published at www.lemetropolecafe.com.
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