Who done it? A lot of investors are asking that question, but no one knows the answer. Among the possible suspects: a speculator who loves to live dangerously; someone who is very good at reading tea leaves; a hedge fund; and a billionaire.
All this speculation is the result of a trade made on November 29. At that time, a person or group of persons bet $1.75 million on options that the price of gold would top $4,000 an ounce by June 2021. If the bettor is correct, he, she or they potentially could make many hundreds of millions in profits. On the other hand, the bettor, if wrong, will be eating humble pie for a long time. Based strictly on the percentages, the investment likely turns into a loss.
Risk, Dreams And Profits
An option is a kind of contract. Some of the strategies and schemes big players utilize in this arena are very complicated, but on a simple level, they are fairly easy to understand.
U.S.News explains options as “an agreement that gives the buyer the right to buy or sell shares of a stock at a given price over a given period of time in the future. Each option contract typically represents 100 shares of the underlying stock.”
Options make it possible to make a great deal of money in a relatively short amount of time with a modest amount of capital. Many options players have made gains of hundreds of percent on their speculation and lucky players have made gains of thousands of percent - sometimes in just a few days.
But not everybody is that fortunate. Most, in fact, are not. A study done by the Chicago Mercantile Exchange found that approximately 75 percent of all options sold over a three-year period expired worthless, which means a lot of investors and speculators lost a lot of money on them. Other studies have found that the percentage of people who lose money in options is even higher. Of course, neither individuals nor powerful Wall Street firms who had these experiences like to talk about them.
Starting To Glitter Again?
On December 26, an ounce of gold was trading at $1,515. To put this in perspective, this price is much lower than the all-time high of approximately $1,900 per ounce back in 2011. But it’s also much higher than the roughly $1,075 low it made in late 2015.
Somebody out there is very confident that between now and June 2021 the price of gold will not only make a new all-time high, but make one that’s more than double the high reached in 2011. If gold, in fact, does reach $4,000 an ounce, the price will have made an exceptional percentage gain.
Zero Hedge compiled the following, which explains the potential gains and losses in this transaction:
In June 2021:
*If gold trades at $4,000 or less, the buyer loses the entire $1.75 million;
*Between $4,000.01 and $4003.49 the call buyer will lose some but not all of the bet;
*At precisely $4003.50 the call buyer breaks even;
*At $4,100 the call buyer nets $48.25 million ($50 million minus the initial $1.75 million bet);
*At $5,000 the call buyer nets $498.25 million ($500 million minus the initial $1.75 million bet).
Zero Hedge’s conclusion: The most likely thing, by far, in any time frame, is that the buyer loses $1.75 million.
Readers should note that if the buyer’s premise of gold moving sharply higher proves to be correct, he or she could still lose the entire $1.75 million. This could happen if gold rallies sharply but remains below the target price through June 2021. Even if gold skyrockets to $5,000 in the following month, the trade would still be a complete loss.
What In The World?
In order for gold to rally so sharply, some exceptional developments will have to occur. What might those be? Here are some events within the realm of possibility that could be bullish for gold:
*Iran and/or North Korea make an atomic bomb, perfect their missile programs and threaten the world;
*The world economy loses confidence in the US dollar and demands a currency backed by hard money;
*A major bank(s) fails, and the ripple effects shake the world’s banking system;
*The combination of problems from rising US debt and deficits unleashes very high inflation;
*Natural disasters devastate economies;
*Rising demand for the yellow metal results in a shortage.
If gold soars to more than $4,000 an ounce by June 2021, it will be easy to know who made the bet. Just look for a person or persons with a huge grin glued on his or her face. But there are more important things than curiosity. Let’s hope the world will still be in one piece at that time.
Sources: goldprice.org; seekingalpha.com; usnews.com; zerohedge.com.