Investors Bet on Big Gains by Gold, Silver

Options bets are signaling the precious-metals resurgence has much further to go, with traders making wagers that gold may rally an additional 40% and silver almost another 80%.

The most popular option on the SPDR Gold Trust exchange-traded fund, known as GLD, is tied to prices jumping 27% to $180 a share, according to options data provider TradeAlert.

Another popular option pays out if GLD reaches $200, or more than 40% higher than the current level. GLD is a widely used gold ETF that tracks the metal’s prices. Shares closed Monday at $141.39 each.

Options are financial products that give a buyer the right but not the obligation to buy or sell. Investors tend to use them to make a speculative bet on an asset, or to hedge another position.

The precious-metals market—which was listless for much of last year—has come roaring back in 2019. Prices have outperformed, as uncertainty from the U.S.-China trade war, political unrest in Hong Kong and Britain’s exit from the European Union has pushed investors into assets deemed to be havens. And with the U.S. in the midst of the longest economic expansion on record, recession worries have escalated, boosting demand for metals such as gold and silver.

Regal Assets Banner

“Despite the recent rally, we do not yet think a recession is fully discounted in the gold price,” Natasha Kaneva and Gregory Shearer, analysts at JPMorgan Chase & Co., recently wrote in a note.

The enthusiasm for gold has spilled over into silver, as investors seek less crowded markets for safety. They made similar extreme bullish bets on the iShares Silver Trust exchange-traded fund, known as SLV.

The most popular option currently are contracts that pay out if SLV rises 19%, from $16.83 a share to $20. Another popular position would pay out if SLV climbs to $30, or 78% above its current level.

GLD and SLV dropped slightly in trading on Monday. But investors have poured money into both all year. About $1.14 billion has gone into SLV, with $425 million of inflows in the past month alone. GLD has seen $2.26 billion, with almost $900 million in the past month.

While gold prices could retreat later this year, risks like a “hard Brexit” or a dollar intervention could further bolster its appeal in the next 12 months, according to RBC Capital Markets’ Christopher Louney last week. Investor chatter has picked up in recent months about whether the U.S. will intervene in the currency market to weaken the dollar. The dollar tends to move in the opposite direction of gold.

And while silver has more industrial uses than gold, making it less of a pure haven trade, some analysts say continued gloom in the macroeconomic outlook could help its gains eclipse gold’s. Bullion is up 18% this year, while silver has added 17% so far.

“While silver has started to outperform gold, the silver-gold ratio still has a ways to go before it reaches 2016 levels,” Pravit Chintawongvanich, an equity derivatives strategist a Wells Fargo Securities, wrote last week.

Regal Assets Banner

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s