One quality of a successful investor is the ability to change direction midstream. 

While average investors will stick to their opinion no matter what, the skilled market player is able to reverse positions swiftly when provided enough information that their original premise is no longer valid.#-ad_banner-#

This is exactly what happened with my bearish view on gold. Just this past August, I told readers about a few compelling reasons to stay out of the gold-buying game and even to short the commodity several times in the past — until now.

I am a huge proponent of following the money trail when it comes to investing, so I closely observe what the professional investors are doing. 

Heavy activity in bullish volatility options
While this alone may not be a bullish signal for gold, if you combine it with heavy, hedge-fund buying, then it paints a compelling long-term picture for the precious metal. 

The Federal Reserve just announced another round of quantitative easing (QE). This so-called QE3 stimulus program is focused on buying bonds and mortgage bonds in particular. QE3 should act as a back stop to the financial markets by reducing volatility even further than it has been recently. 

In addition, the CBOE Market Volatility Index (VIX) has been trading at 5-year lows, hitting 13.30 in August. But it looks like a trader or fund is betting on a sharp increase in the VIX by October expiration. The open interest on the October 60 VIX calls was about 37,000, while traded volume was about 40,000. This is super heavy interest.

What makes it even more intriguing is that many of the nickel call bullish options were purchased in blocks, ranging from 2,000 to 5,000 each. My educated guess is that these calls were from a single player who strongly believes there will be a huge spike in volatility by mid-October. 

While this may be dismissed as a gambling whale betting everything on red at the roulette table, this investor could also be privy to information that could potentially result in a 300% VIX spike by expiration day. Obviously, this will take a catastrophic economic or geo-political event to counteract the effects of QE3, thereby spiking volatility. 

If this possible insider is correct, then gold could also spike higher, as investors scramble for the safety of hard commodities such as gold. As stated earlier, this observation is very speculative. 

But when I recently took a close look at the second-quarter 13-F filings of three of hedge-fund managers I hold in very high regard — George Soros, David Einhorn, John Paulson — all changed my opinion about gold.

All three mega-investors have heavy, long-term exposure to gold exchange-traded funds (ETFs) and other gold-related stocks. Remember,13-F filings reveal long equity positions but not holdings in physical commodities.  

Here’s a brief recap of what these three highly-regarded financial gurus are doing:

• Soros Fund Management holds about $140 million in the SPDR Gold Trust ETF (NYSE: GLD). The fund also holds solid positions in the Market Vector’s Gold Miners ETF (NYSE: GDX) and the Market Vectors Junior Gold Miners ETF (NYSE: GDXI), not to mention, smaller positions in gold-mining companies. Regardless of what you think of Soros’s politics, he remains one of the most successful traders who have ever lived.

• David Einhorn of Greenlight Capital is a well-known short seller and extremely successful activist investor. But he has several gold long positions in the portfolio. These positions include $269 million in the Market Vectors Gold Miners ETF (NYSE: GDX) and smaller long positions in Barrick Gold (NYSE: ABX). Although we don’t know the exact amount, in 2009, Einhorn sold his position in the SPDR Gold Trust ETF (NYSE: GLD) for physical gold. He stores this gold in a secret vault somewhere in Manhattan. Allegedly, there is upwards of $100 million of the precious yellow metal resting in this location.

• John Paulson’s investment firm, Paulson & Co., holds substantial long positions in gold ETFs and mining stocks. What is mind blowing about Paulson is his fund holds $3.4 billion of the SPDR Gold Trust ETF (NYSE: GLD). He is clearly among the largest, if not the largest, gold speculator on Earth. 

Risks to Consider: Big hedge funds can also lose money. Although they are privy to the best information, and can buy financial tools and brains, they are not always correct. Be certain to always use stops and position size correctly when investing in precious metals.

Action to Take — > Clearly there are strong bullish signs that gold is a good investment right now. I like the SPDR Gold ETF (NYSE: GLD) on a break out above $175. My 18-month target price would be $200 with stops at $165.

P.S. My colleague Nathan Slaughter recently revealed another commodity that’s in a real bullish uptrend. Since then, its prices have quietly climbed higher, and they could even double again very soon. You still have a chance to get in on the action early, but it won’t last long. Click here to get all the details and to find out how you can profit.