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Investors Boost Bets Gold Will Reach $1,000 on Economic Turmoil
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By Millie Munshi and Pham-Duy Nguyen
Feb. 10 (Bloomberg) -- Gold speculators have increased their bets this year by 24 percent that prices will reach $1,000 an ounce by April.
Open interest in options that allow the holder to buy gold at $1,000 by April surged to 9,934 contracts as of Feb. 6 from 8,005 at the start of the year on the New York Mercantile Exchange’s Comex division. Mounting financial turmoil is boosting demand for the precious metal as a haven. Since Jan. 15, the price of the option has more than doubled, outpacing the 11 percent gain in gold futures.
Goldman Sachs Group Inc. and UBS AG raised their forecasts for gold last week, citing the increased risk in financial markets and mounting concern that government spending on bank bailouts and economic stimulus will spur inflation. Hedge funds and other large speculators increased their net-long positions, or bets gold will rise, by 10 percent last week to the highest level in six months, government data show.
“There’s a lot of uncertainty right now that does make gold look attractive,” said Daniel Bruno Sanz, the head of CEO Capital Management in New York. “The best way to take advantage of this market is to buy the option.”
Gold has gained for eight straight years and soared to a record $1,033.90 an ounce in March as mounting bank losses and a declining dollar increased demand for the metal as a store of value. Financial turmoil may push the price above that record to $2,000 as traders buy the metal as a safe haven, said Eric Sprott, the Canadian money manager who last year predicted banking stocks would collapse.
Betting on Rally
Net-long positions among large speculators in Comex gold futures jumped to 155,306 contracts as of Feb. 3, the highest total since Aug. 5, the U.S. Commodity Futures Trading Commission reported Feb. 6.
Options contracts that allow holders to buy 100 ounces of gold for $1,000 each by April traded at $15.50 on the Comex yesterday, compared with $7.70 on Jan. 15. In that period, options contracts that allow traders to sell gold at $800 by April plunged 73 percent.
Gold futures for April delivery lost $21.50 to $892.80 an ounce yesterday on the Comex.
At Equidex Brokerage Group, the number of clients buying gold options is up by as much as 10 percent from a month ago, said Jeff Delle Chiaie, a broker at the firm in Closter, New Jersey.
“The focal point is $1,000,” said Philip Gotthelf, the president of Equidex, who correctly predicted in October crude oil would fall below $40 a barrel. Gold above $1,000 is a “warning signal to central banks that people have already lost faith in currencies,” Gotthelf said.
Economic Stimulus
Governments worldwide are lowering interest rates and spending trillions of dollars to revive their economies, which will lead to inflation in the future and boost the gold price, Gotthelf said.
The Federal Reserve has slashed the benchmark lending rate to 0.25 to 0 percent while the Bank of England’s rate is at 1 percent. Completion of the stimulus package that the U.S. Senate is weighing would raise the government’s commitment to solving the financial crisis to $9.7 trillion, according to Bloomberg data.
The Fed, the Treasury Department and Federal Deposit Insurance Corporation have lent or spent almost $3 trillion in the past two years and pledged to provide as much as $5.7 trillion more.
Shares of mining companies and gold futures may be more appealing than options, a market that is less liquid because it is smaller, said Gijsbert Groenewegen, a fund manager at Gold Arrow Capital Management.
“Gold is going to make new highs, but I don’t know if I would get into the options,” Groenewegen said.
Boosting Forecasts
Goldman Sachs said on Feb. 4 gold will rise to $1,000 within three months. Analysts at UBS last week said their average gold forecast for this year is $1,000 an ounce.
“If you have an aggressively bullish view, the outright $1,000 April call is the way to go,” said William O’Neill, a partner at Logic Advisors in Upper Saddle River, New Jersey. “It’s an indication of rising optimism as far as gold is concerned.”
To contact the reporters on this story: Millie Munshi in New York at [email protected]; Pham-Duy Nguyen in Seattle at [email protected].
Last Updated: February 10, 2009 00:00 EST
