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How the big money is betting on gold now

Major action in gold

Options traders are betting big on gold. Three massive trades in the gold ETF executed over the past three weeks imply a belief that gold will rise by 5 to 7 percent by the end of the year.

Of all the options currently trading in the SPDR Gold Trust (GLD), the most active is the December 130-strike call, with nearly 66,000 contracts currently open on the name. The volume came almost entirely on three days—Jan. 31, when 24,000 of these calls were traded, the subsequent trading day, Feb. 3, when 21,500 more calls were traded, and this past Thursday, when volume topped 20,000.

Since buying a call gives an investor the right, but not the obligation, to buy shares of a stock or ETF at a given strike price, these purchases will make money if the gold ETF is above $130 by more than the cost of the calls at December expiration.

That means that at a price of $6.75, which is where the December 130-strike calls were trading on Thursday, the trade will only be profitable if the GLD rises from $127.40 to $136.75, which implies a gold price of about $1,425.

(Read more: Now that gold touched $1,300, here's what's next)

Tom Grill | Age Fotostock | Getty Images

What makes the action more interesting is that it is not simply the product of widespread demand. On Thursday, 19,000 December 130-strike call contracts traded, meaning that $12.8 million was outlaid for that single trade. That would seem to indicate that the trades are being made by an institutional player with seriously deep pockets.

"Either they're getting out of stock, or they think gold is going significantly higher," said Brian Stutland of the Stutland Volatility Group. "But they would have to be thinking that gold's going to $1,400 sometime soon."

If the ETF is trading below $130 in mid-December when the trade expires, then the call is rendered worthless, and the entire amount of money outlaid is lost.

(Read more: This will drop gold to $1,000: Credit Suisse pro)

Gold has had a very strong start to the year, rising 8 percent as it attempts to bounce back from a miserable 2013.

—By CNBC's Alex Rosenberg. Follow him on Twitter: @CNBCAlex.

Follow the show on Twitter: @CNBCOptions.