Call Option Volume Offers Clues us About Future Gold Prices

Gold prices have been rising. Since the end of the third quarter of 2022, gold is up about 18% and reached a 12-month high in the last week. Many investors think it will rise even further.

How do we know this? We know because the 5-day rolling trading volume of call options on the SPDR Gold Trust has risen more than five-fold in recent weeks. In fact, these inflows into bullish call options on gold have reached near-record levels.

Investors purchase call options when they believe the value of an asset will rise. The call option contract gives them the right, but not the obligation, to purchase an asset – in this case, gold – at a fixed price. In contrast, a put option gives the contract holder the right to sell an asset at a fixed price. Recent data shows that the ratio of calls to puts on gold prices has increased dramatically indicating that the market believes gold has even more room to rise.

Investors appear so bullish that they have increased their purchase of “out of the money” options. These are contracts that give them the right to buy gold at a price that is above the current market price. Clearly, investors believe that buying gold above the market value is an investment that will pay off.

It’s likely that this optimistic outlook is being fueled by SVB’s collapse and troubles in the banking industry. These developments have led many to question if their bank has the capital to fund withdrawals. The spot price of gold made a steep ascent after the news of SVB’s demise. As other banks faltered, both in the US and abroad, many account holders lost faith in their banks. Gold is giving these individuals an alternative because it is an asset that is recognized the world over.

Importantly, it is also an asset that, when held in physical form, is free of counterparty risk which is the risk that other parties involved in a financial transaction will not fulfill their obligations.

These recent bank failures have surfaced uncomfortable memories of the 2008 global financial crisis even though the two scenarios have many differences. However, despite those differences, many investors appear more vigilant today and more eager to act quickly and decisively by moving more assets into gold.

This decisiveness is seen in the increase of gold buying activity not only in options contracts, but also futures contracts, and exchange-traded funds. As Akash Doshi, head of commodities for North America at Citigroup, recently remarked, “it has been pretty much one-directional buying.”

This trend is likely to continue as Fed rate increases continue to weigh on the equities market and as new regulations emerge to deal with excessive risk-taking among banks.

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