Metals bulls going for gold
08/29/17

Copper and iron moved first, and now some traders are going for gold.

The metals sector has been in the midst of a quiet rally all summer as investors gain confidence in the global economy. Options traders have successfully played the move in big-name stocks like Freeport-McMoRan (NYSE: FCX), Alcoa (NYSE: AA), and Vale (NYSE: VALE).

Precious metals like gold and silver mostly watched from the sidelines as their industrial peers took off. But that seemed to change yesterday as bullion shot to its highest level of the year. 

Newmont Mining (NYSE: NEM) led the charge with a series of transactions designed to profit from more strength in the next two weeks:

  • Traders started with the 8-September 36.50 calls, amassing 7,000 for $1.26 to $2.15. Calls fix the price where a security can be bought, so they have the potential to appreciate to the upside and go worthless if no rally occurs. 
  • Based on an average premium of $1.40, Monday's contracts will double if the stock climbs less than 3 percent to $39.30 and triple from a 6 percent move to $40.70. 
  • NEM rose 3.54 percent to $38.30, and is already above the $37.90 breakeven price. They'll go to zero if the shares reverse downward and close below $36.50.
  • There was put selling too. Some 5,200 1-September 38 puts for $0.30 and $0.31, plus 3,200 1-September 38.50 puts for $0.49 and $0.50. Those trades are looking for NEM to hold its ground through Friday or move higher. They'll keep their premium if they're right but face potentially big losses to the downside if they're wrong.

Barrick Gold (NYSE: ABX) followed with 2,600 22-September 18 calls bought for $0.37 and $0.38. ABX rose 3.09 percent to $17.67.

ABX and NEM are the world's two largest producers, accounting for more than one-quarter of the planet's yearly output.1 There was also activity at the pipsqueak level of Northern Dynasty Minerals (NYSE: NAK), a small-cap mine developer that's yet to begin operations at its Pebble Project in southwest Alaska. This time, 3,500 October 2 calls were bought for $0.20. NAK reversed earlier gains and ended down 0.56 percent to $1.77.

Newmont Mining (NEM) 3/6/17 - 8/28/17 chart

Source: OptionsHouse by E*TRADE.

While gold and silver have flown under the radar for most investors this year, the space has drawn increasingly bullish commentary since the middle of July.2 The metals also tend to move in the opposite direction as the U.S. dollar, which is now plumbing its lowest levels in over a year. On top of that, most of these stocks are back above their 200-day moving averages. Chart watchers often view that as a sign that longer-term momentum has shifted.

Monday's activity was a welcome splash of excitement for traders languishing through one of the quietest stretches of the entire year–those inert doldrums before Labor Day. Overall options volume across the entire market was the lowest in more than a month. But it was well above average levels in stocks like NEM, ABX, and NAK.

What about Goldcorp (NYSE: GG)? Yep, it also turned some heads with about 1,600 contracts bought in both the November 14 calls (for $0.50) and the 1-September 13 calls (for $0.24 to $0.41).

Bottom line: Bulls are widening their horizons into gold as the metals rally widens.

 

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1. Mining.com: World's top 10 gold mining companies – 2016. 3/3/17.

2. CNBC.com: This hammered precious metal could surge 10 percent within months: Analyst. 7/12/17. Marketwatch.com: Gold ends above key $1,230 level as investors weigh interest-rate outlook. 7/17/17. Reuters: PRECIOUS-Gold up, poised for more gains on soft U.S. rate outlook. 7/17/17. Marketwatch: Speculators haven’t been this bullish on gold since October. 8/21/17. CNBC: Gold is doing something unusual and quite bullish. 8/25/17.