By Andy Hecht, Commodity Options Expert
Dear Sovereign Investor,
This move – weak holders selling their gold – is the next tipping point in gold. And it’s your cue to add more gold to your holdings NOW.
Because gold is “moving on up baby!”
It’s not in a bubble… as several market naysayers would have you believe. Here’s why…
What the Technical Indicators
Say About a Gold Bubble
First, open interest – that’s the number of longs and shorts in the futures market – has actually dropped by over 13% since the beginning of 2011! That means that there are fewer positions in the market. This is not the hallmark of a “bubble.”
Second, the volatility that option traders believe the gold market will be trading in the future is at levels between 16% and 20%. Currently gold’s historical volatility is running at 15%. So option traders are on to something…
These levels are consistent with a non-volatile- slow and steady market.
If implied volatility – which determines option prices – spiked suddenly to 40% or 50%, then I’d argue that the market is overdone! Since the rally has been slow and steady, option prices haven’t blown through the roof like that.
Third, the precious metal’s Daily Relative Strength Index (the RSI), which measures if gold is oversold or overbought, is at 67%.
Clearly, none of these numbers indicate any “frenzy” in the gold market.
So where’s this gold bubble analysts are talking about?
It’s nowhere.
It doesn’t exist.
Gold is not even remotely near bubble territory.
In Fact, the Best is Yet to Come for in Gold
Just think about it. Central banks across the globe are still buying gold.
The Chinese continue to consume more than their annual gold production. On February 19th, 2011 Forbes reported that, “China’s Industrial and Commercial Bank (ICBC) says purchases of physical gold and gold-related investments are growing at record setting rates.”
John Paulson, the investor who made billions during the 2008 housing crisis, owns 25% of the largest gold ETF (GLD). He’s owned it since gold was $900 an ounce. He also holds significant positions in gold producing companies. Today, his ETF holding alone is worth over $14 billion!
George Soros owns a significant amount of gold too.
J.P. Morgan Chase recently announced it would accept gold as collateral for loans.
With fiat currencies collapsing around the globe, economies teetering on the brink of collapse, natural disasters, civil unrest, war, and just general fear and uncertainty gold is a strategic reserve… a safe haven.
Gold Remains in a Sustained Uptrend
Gold has been in a sustained uptrend for ten years. Since 2000, it’s up over 500%. And I believe this trend will continue.
Here’s a little-followed fact for you. The number of contracts in out-of-the-money gold call options is huge!
There are 25,000 contracts open on June $2,000 Call options and June $2,500 Calls. This means some traders and investors believe gold will be above the $2,500 per ounce mark by June.
Even more staggering are the more than 37,000 open contracts on December $2,000 Calls and December $3,000 calls! Some traders and investors expect gold to cost more than $3,000 an ounce by December.
These contracts represent over $14 billion worth of gold if it goes to a price higher than $3000 per ounce.
The Gold Trend Will Be Your Friend to $3,000 an Ounce
The gold daily chart:
It’s important you don’t miss this golden ride, so let me reiterate: there is no bubble in the gold market.
All market indicators, both technical and fundamental, point to higher prices in 2011 and beyond.
Buy gold.
Happy trade hunting!
Andy Hecht
Blog: Commodity Options Outlook