Behind the million-dollar bet against gold

The million-dollar bet against gold
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With the Fed's highly anticipated decision days away, one trader appears to be making a big bet that gold is set to suffer as a result.

On Thursday, an investor bought 9,500 October 36-strike puts on Newmont Mining for $1.23 per share, or $123 per options contract. Since Newmont would need to close below $34.77 for the trade to make money, this trader is betting about $1.2 million that Newmont Mining will fall by more than 10 percent in a month's time.

The trade comes just as gold and the gold miners seem to be tapering off. Gold has rallied more than 24 percent this year, but has been on a recent downtrend after struggling to break out of a stagnant summer. The gold miners have seen a tremendous rally of some 90 percent this year on their part, but they too have dipped as of late, as concerns about a potential Federal Reserve rate hike come to the fore.

Indeed, Fed anxiety explains the trade, according to Eddy Elfenbein, editor of the "Crossing Wall Street" blog.

"What drives the miners is real short-term interest rates," he said Thursday on CNBC's "Trading Nation." "The higher that is, the worse it is for gold, and by extension the gold miners. That's why all eyes are on the Federal Reserve and their meeting next week."

While Elfenbein doesn't believe that the Federal Reserve will decide to raise interest rates at next week's meeting, he does warn that in the event that a rate hike does happen, gold could suffer. Rising interest rates would likely send the dollar higher, which in turn would hurt gold. In addition, gold tends to suffer when rates rise, which makes sense given that gold yields nothing, so higher rates make it look worse in comparison.

"Higher rates are kryptonite to gold and I think that would be very poor for the miners," Elfenbein said. "We've started to see some of the miners pull back recently after their tremendous run-up. They could be looking for some more pain here on out."

CME's FedWatch tool currently shows that traders see only a 15 percent chance of a September hike. But Jake Weinig of options-focused hedge fund Malachite Capital believes that the trader must see a September Fed hike as more likely than that.

"If we get some inclination as to when it may be, you're going to see a nice sell-off both in the markets as well as in gold," he said. "I think that's exactly what this bet is: an investor making a bet that potentially we may hike next week and if we do, they're going to get paid out nicely for it."

On Thursday, Bloomberg reported that Cohen & Steers cut its gold allocation ahead of next week's Fed news.

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