The Striking Price
TUESDAY, FEBRUARY 11, 2014
Gold Price: Chinese Economy May Send It Higher
By STEVEN M. SEARS
Economic unease in the world's second-largest economy may be creating a new class of gold bugs.
It is time to reconsider gold.
Reports that buying in China rose 41% last year to a new record suggest Chinese investors are under the spell of gold, perhaps because of concerns about the stability of their own economy. If the China Gold Association's data on buying prove significant, gold may finally advance after several years of declines.
With the SPDR Gold Trust (ticker: GLD) at $123.75, investors can buy the GLD January $124 call that expires in 2015 for $8.40.
The trade thesis is largely predicated on an eastern retelling of a tale well-known to American investors: an economy weakened by financial sector excesses that drives citizens to buy something they think is a safe asset.
Troubles in China are now regularly mentioned as key risks to the global economy. It is reasonable to conclude that Chinese investors might be interested in gold for the same reasons that not-so-long-ago captivated many Americans: economic weakness, inflation, debased currencies, and perhaps even civil unrest. My colleague Randy Forsyth notes that wealthy Chinese are trying to get their money out of the troubled domestic economy, and are increasingly investing in gold.
Of course, a communist nation has tools at its disposal that are alien to democratic nations, but fear of the unknown is a proven motivation to buy gold. A panicked populace is not a reason mentioned by media reports of the China Gold Association, but it is reasonable to conclude Chinese citizens view gold as a store of value since powerful troubles are lurking in their real-estate and financial markets that might seriously roil the world's second-largest economy.
The price of gold has historically been heavily influenced by India, but if China increasingly views gold as a store of value, the sheer size of China's market may reignite gold's prices and alter the historical dynamic.
Action in the U.S. options market may offer some support for this thesis. Even though the price of the SPDR Gold Trust is off by 7% in the past three years, options investors are betting big on bullish calls that will increase in value if the fund trades above $180 by January 2015. With the fund recently around $122, the top two outstanding positions are the January $150 and $180 calls. Overall, 2.3 million calls are outstanding, almost three-times the 841,000 puts.
The options market positioning indicates a bullish tilt on a product that attracts bears. Consider the calls a wager on changing dynamics, perhaps best evidenced by the fact that the SPDR Gold Trust is up 6% this year, while stocks have declined. The Market Vectors Gold Miners exchange-traded fund (GDX) is up a whopping 20% year-to-date.
If the ETF rises to $140, the recommended SPDR Gold Trust January $124 call would be worth $16. And it could certainly go higher if Chinese citizens become acquainted with the end-of-day fears that turned so many people into gold bugs during the financial crisis that began in 2007.
Reports that buying in China rose 41% last year to a new record suggest Chinese investors are under the spell of gold, perhaps because of concerns about the stability of their own economy. If the China Gold Association's data on buying prove significant, gold may finally advance after several years of declines.
With the SPDR Gold Trust (ticker: GLD) at $123.75, investors can buy the GLD January $124 call that expires in 2015 for $8.40.
The trade thesis is largely predicated on an eastern retelling of a tale well-known to American investors: an economy weakened by financial sector excesses that drives citizens to buy something they think is a safe asset.
Troubles in China are now regularly mentioned as key risks to the global economy. It is reasonable to conclude that Chinese investors might be interested in gold for the same reasons that not-so-long-ago captivated many Americans: economic weakness, inflation, debased currencies, and perhaps even civil unrest. My colleague Randy Forsyth notes that wealthy Chinese are trying to get their money out of the troubled domestic economy, and are increasingly investing in gold.
Of course, a communist nation has tools at its disposal that are alien to democratic nations, but fear of the unknown is a proven motivation to buy gold. A panicked populace is not a reason mentioned by media reports of the China Gold Association, but it is reasonable to conclude Chinese citizens view gold as a store of value since powerful troubles are lurking in their real-estate and financial markets that might seriously roil the world's second-largest economy.
The price of gold has historically been heavily influenced by India, but if China increasingly views gold as a store of value, the sheer size of China's market may reignite gold's prices and alter the historical dynamic.
Action in the U.S. options market may offer some support for this thesis. Even though the price of the SPDR Gold Trust is off by 7% in the past three years, options investors are betting big on bullish calls that will increase in value if the fund trades above $180 by January 2015. With the fund recently around $122, the top two outstanding positions are the January $150 and $180 calls. Overall, 2.3 million calls are outstanding, almost three-times the 841,000 puts.
The options market positioning indicates a bullish tilt on a product that attracts bears. Consider the calls a wager on changing dynamics, perhaps best evidenced by the fact that the SPDR Gold Trust is up 6% this year, while stocks have declined. The Market Vectors Gold Miners exchange-traded fund (GDX) is up a whopping 20% year-to-date.
If the ETF rises to $140, the recommended SPDR Gold Trust January $124 call would be worth $16. And it could certainly go higher if Chinese citizens become acquainted with the end-of-day fears that turned so many people into gold bugs during the financial crisis that began in 2007.
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