Investors are boosting bets gold will soon drop to $1,000 an ounce, options data show, as the US Federal Reserve looks set to hike interest rates next week for the first time in nearly a decade.
Gold has already lost 9 per cent this year, as investors expect higher prices to dent demand for the non-interest-paying metal.
A drop to $1,000 would be gold's lowest since October 2009, and could potentially cause a spike in physical purchases in key consumers, India and China. It is currently trading around $1,070, a near-six-year low.
At least two brokerages, ABN Amro and National Australia Bank, have said in the last week gold will drop to $1,000 in the coming months. Goldman Sachs said in November it expected gold to hit $1,000 in twelve months.
Put option positions tied to the $1,000 strike price for the most active February COMEX gold futures have jumped over 200 per cent from the beginning of November to 6,950 lots as of December 7.
They have risen by 1,600 lots in the last two sessions alone, likely after Friday's robust US nonfarm payrolls data that strengthened the case for a rate hike.
Put positions for the $975 strike have increased nearly 10 times since the beginning of last month to Monday.
The options expire on Jan. 26, indicating traders expect prices to slip towards those levels by then.
Bullish call options have also increased during the same period, but bearish put options at $1,000 strongly outnumber the call options of 3,998 at $1,100. (Graphic link: http://tmsnrt.rs/1NSSP8r)
"I wouldn't be surprised to see gold trade closer to $1,000 by the end of December," said Victor Thianpiriya, commodity strategist at ANZ, adding it could be triggered after the Fed's Dec. 15-16 policy meeting, when the US central bank is widely expected to hike rates.
"There is going to be significant policy divergence between Fed and other major central banks. So that is going to keep the dollar pretty well bid and gold on the sidelines."
A strong dollar makes greenback-denominated gold more expensive for holders of other currencies.
Investors have been cutting back on their gold exposure. Assets in SPDR Gold Trust, the top bullion exchange traded fund, are at their lowest since September 2008.
There are risks of large fund outflows if prices trade closer to $1,000, Barclays said on Monday.
"There could be more than 700 tonnes of gold exchange traded products becoming loss-making with lower than $1,000 gold prices, by our estimation."