A rise in activity in gold options amid geopolitical tensions and a record-long bull market for US equities suggests that investors are betting gold prices have found a floor, traders said.
Open interest in Comex gold call options giving the holder a right to buy the metal at $1,200 per ounce in December 2018, surged last week to a record 1,136 contracts, from 79 contracts on July 31, the largest in at least two years.
September call options at the same price also hit a record for open interest volume this week. Open interest is the number of open contracts.
"The high level of open interest in options is a reflection of anxiety about geopolitics and equities being overbought that's starting to creep into the gold market," George Gero, managing director of RBC Wealth Management, said last week.
Total open interest across Comex gold options also has risen to 1.501 million current contracts from 1.205 million contracts on July 31, the highest since 2006, according to Reuters data.
As of Wednesday, month-end open interest across Comex gold options was at 1.486 million current contracts, the largest since April 2015, CME Group data shows. Monthly average daily volume on Comex gold options was at 58,970 as of Wednesday, its highest since November 2016.
Spot gold prices, which were trading at $1,206.52 per ounce on Friday, are off nearly 12 per cent since hitting a 2018 high of $1,365.23 in April, led by a firmer US dollar and expectations of rising US interest rates.
Gold is typically used as a safe haven to hedge against more volatile swings in the stock market, but bullion is highly sensitive to rising rates, since it does not pay interest, and costs to store and insure.
The S&P 500 Index marked its longest bull-market run in history this week, according to some investors' definition.
Some economists believe US economic growth will slow in coming quarters, according to a Reuters poll of economists, and make a stronger case for gold. The US economy grew at a 4.1 per cent annual rate in the second quarter, a four-year high.
"I think that traders see [gold options] as a way to step into the market and play gold either way without paying a substantial premium," said Josh Graves, senior commodity strategist at RJO Futures.
Meanwhile, speculators have increased their net short position in Comex gold futures and options contracts to the highest since records became publicly available in 2006, according to government data.
"If the shorts have to cover, then that could make the market explode to the upside," said Walter Pehowich, executive vice president of investment services at Dillon Gage Metals.