Enormous Bullish Gold Bet was just made with Call Options

(January 12, 2015 - by Brian Spurlock, Octa Finance)

Someone with a big pocket, for sure a professional, made a huge Gold bullish option bet during the last trading session. The trader purchased 40,000 Mar 2015 GLD or SPDR Gold Trust (ETF) (NYSEARCA:GLD) gold call options. The strike of the call options was $120, which is not very far from the current price of about $117, so the premium paid was huge. Still due to the limited time until March 2015, it’s obvious that the option trade was a bold, directional bet expressing the view that Gold might appreciate up to $130-$135. The amount committed to the trade was $10+ million. If the price of GLD reaches the range $130-$135 before expiration, this pro trader, probably working at a desk in a big bank or a hedge fund, will make between 300% and 600% of his investment or $20-$50 million net profit.

Chart analysis also shows some positive technical setups. We have a MACD bullish divergence. There were three higher lows of the MACD with 3 lower lows of the Gold price. You can also see on the chart a bullish falling wedge. Such formations have historically led to many huge price reversals. If it breaks, it will probably do it fast in our view.

Chart: MACD Bullish Divergence + Bullish Falling Wedge

Source: Backadjusted Gold Price Chart – RightEdgeSystems, OctaFinance Interpretations

It’s very important to note also that we have a third technical bullish factor. There is a head and shoulders pattern on the chart. It’s also one with declining volume, which is exactly what technical experts Edwards and Magee would expect to see in such a pattern. This H&S could launch and reconfirm the Bullish Falling Wedge. If we have a breakout, and we were to trade gold, we will place our stop below the breakout bar.

Chart: 4 Month Head & Shoulders with declining Volume

Source: Backadjusted Gold Price Chart – RightEdgeSystems, OctaFinance Interpretations

More importantly, Gold is very strong in a period of a significant US Dollar rally. This is very rare and shows the relative gold/US Dollar strength. The gold price forecast of the major gold trading bank HSBC, was also raised. Geopolitical fears support gold, as it’s a true safe-haven. Central banks on the East are continuing their gold accumulation while inflation is low.

Even though gold price action points to a bullish scenario near-term, good for short-term trades, some experts warn we should be careful medium-term. Gurus such as: Jim Rogers and Stephen Jones, for example, are bearish medium-term and believe that gold still hasn’t found a bottom. Jim Rogers thinks that the price will first touch $1000 oz. or less before forming a bottom. Stephen Jones, who is the CIO at Kames Capital, states that main reason investors and people buy gold is because they fear inflation, but currently inflation is not high. For example, deflation is entering the Eurozone and inflation is slowing in many countries due to the oil and commodities price slump.