By Chris McKhann
The chinks in gold's armor may be showing up.
Clearly the precious metal still shines bright, but there are indications that those who think that we are seeing a bubble may soon be vindicated. I am not trying to call a top, but some traders are starting to lay bets that gold is at least ready for a substantial pullback on its run to a zillion.
Gold saw a substantial drop on heavy volume Jan. 4, the fifth time in the last two months. Combine that with a potential bearish "triple top" pattern that appears to have formed on the metal's chart, as well in the SPDR Gold Shares (GLD) and the Market Vectors Gold Miners (GDX) exchange-traded funds, and you have at least the potential for downside. The middle peak of the pattern was the higher level from a month ago, when gold futures hit $1,432 an ounce.
Sticking to traditional interpretation, the target of the pattern's top would then be roughly $1,310, the support from early October. But that would be only the first lower low since July, when the most recent run started around $1,160.
The long gold trade has been a notable part of the portfolios of some big players, including John Paulson (who is apparently set to earn another $1 billion or $2 billion for 2010) and the Harvard endowment. On the other side of the coin is George Soros, who has said that the run in gold may be the ultimate bubble--but was quick to note that it could go on for quite some time before bursting.
Some large option volume speaks to the fact that some institutional players may also be positioning for a pullback. Last week a trader picked up 25,000 of the GDX June 46 puts while the fund traded at $58.31, as we noted on InsideOptions.
Puts that far out of the money are unlikely to be hedging on a long position, so it appears that the trader is looking for the miners to potentially lose more than 20 percent of their value in the coming months. And the correlation is 92 percent between the GDX (teal line on chart) and the GLD (magenta line), so that doesn't bode well for the price of the metal itself.
Now, put buying in these big ETFs can mean many things. It can be hedging against shares or other long gold positions. It can be traded against other positions in the underlying stock, at least in the case of the GDX. And sometimes it can be just plain downside puts--straight bets that gold will fall and take the miners with it. That is especially true when volatilities are near 52-week lows and such bets are relatively cheap.
I will be the first to point out that being too early to bet against an asset can be just as expensive as being wrong. But the action is interesting, especially as the equity markets plow to new highs as gold starts to slip.
Disclosure: No positions