Options Predict Gold Recovery

SPDR Gold Trust (GLD) shares moved higher Monday as the markets declined sharply on bad housing and economic news. The call options in the stock were also very active several thousand contracts trading hands at the September ‘08 expiration. The move follows heavy trading last week where 10,000 of the September $85 calls were transacted. Gold prices have declined over the past few months, but some believe that recent turmoil in the financial markets may increase demand for the commodity.

Many experts attribute the fall in gold prices to the decline in the U.S. dollar since it is a dollar-priced asset. Many investors have also begun to move out of commodities and into stocks as they see value in today’s stock markets. However, the decline in gold has been far less than that of commodities in general while many experts even call it a healthy retracement. In fact, increases in the U.S. dollar and a continued decline in stocks may end up boosting prices for the commodity.

Gold has also historically been used as an inflation hedge, and there is clearly an inflation problem. The Consumer Price Index in July has increased 5.6 percent year-over-year thanks to higher food and energy costs. Meanwhile, many other economic threats in emerging markets and conflicts could help boost the price of gold. Finally, the increased threat of a worldwide recession could help spur demand for gold even further, which may have led to recent speculation.

SPDR Gold Trust, formerly StreetTRACKS Gold Trust, is an investment trust that holds gold, and from time to time, issues the SPDR Gold Shares in blocks of 100,000 shares (baskets) in exchange for deposits of gold and distributes gold in connection with redemptions of baskets. The shares represent units of fractional undivided beneficial interest in and ownership of the trust. The investment objective of the trust is for the shares to reflect the performance of gold bullion prices.

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