Golden rules for gold stocks

06/30/22
  • NEM off 27% from April highs after early-2022 rally
  • Options IV recently high as stock consolidated
  • Gold and gold stocks have diverged notably this year

Traders and investors aware of gold’s long-term history know its role as an inflation hedge is sketchy, at best. And as Morgan Stanley & Co. pointed out toward the end of 2021, gold prices were likely to face an uphill battle this year against rising real yields (Treasury yields adjusted for inflation).1

But gold—and gold stocks—did appear to be running the inflation-fighting playbook early in the year. Bullion gained more than 15% from late January to early March, and some gold stocks enjoyed even bigger and longer-lasting rallies—one of the equity market’s few bright spots. The fine print: A big part of that rally represented “uncertainty” buying amid shock of Russia’s invasion of Ukraine. As of Wednesday, gold was down roughly 11% from its March high.

The recent performance of one gold-mining stock, Newmont (NEM), was a good reminder of the relationship between gold stocks and the metal they deal in. On Tuesday, NEM appeared on the LiveAction scan for symbols with 30-day implied volatility (IV) higher than their 30-day historical volatility (HV):

Chart 1: LiveAction scan: 30-day HV < 30-day IV, 6/28/22. Unusual options activity. Options volatility greater than stock volatility.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


Since IV reflects the options market’s expectations of future volatility, one way to interpret this type of data is that the options market thinks these stocks will likely be more volatile over the next 30 days than they were over the past 30 days.

If that’s the case for NEM, it would represent a departure from recent price action. Gold has been mired in a consolidation for nearly six weeks, while NEM has been moving sideways for the past two:

Newmont (NEM) and Aug. gold futures (GCQ2), 2/9/22–6/29/22. Newmont (NEM) and gold futures price chart. Sometimes in sync, other times not.

Source: Power E*TRADE. (For illustrative purposes. Not a recommendation.)


But as much as gold and NEM have been in sync recently, the chart also shows how much the two have parted ways at times this year. While gold (green line) peaked in early March, NEM (after initially pulling back with gold) rallied 18% between March 16 and April 18 while gold moved mostly sideways.

Whether NEM or gold will soon break out of their trading ranges—or keep moving if they do—remains to be seen. But it’s important to remember that gold mining stocks represent companies, not commodities. Demand for stocks in general, as well as assessments of an individual company’s business prospects, can impact how a stock trades, regardless of what its “underlying” commodity is doing.

In other words, just as traders shouldn’t expect gold to rise with inflation (or, for that matter, decline when inflation subsides), they shouldn’t assume gold stocks will always move in lockstep with gold.

Final note: NEM did, in fact, make a fairly large down move yesterday (more than -2% intraday) after appearing on Tuesday’s LiveAction scan. The move dropped the stock to the bottom of its recent range (roughly $60.50).

Market Mover Update: Three days after Merck (MRK) hit a new record high, its July $100 call is trading for less than one-sixth of where it peaked on Monday (see “Covered call prescription“).

Today’s numbers include (all times ET): Weekly Jobless Claims (8:30 a.m.), Personal Income and Outlays (8:30 a.m.), PCE Price Index (8:30 a.m.), Chicago PMI (9:45 a.m.), EIA Natural Gas Report (10:30 a.m.).

Today’s earnings include: Micron Technology (MU), Acuity Brands (AYI), Walgreens (WBA), Constellation Brands (STZ).

 

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1 MorganStanley.com. 2022 Global Strategy Outlook: Fundamentals Will Dominate. 12/14/21.

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