Traders go for gold as political jitters swirl
05/18/17

Political uncertainty apparently has traders going for gold.

Precious-metal stocks have been jumping for a week amid criticism of the Trump administration. That's put them back in the green for the year following a late-April selloff.

There may be other reasons for the bounce. After all, capital has been streaming overseas recently and the U.S. dollar is at its lowest levels in six months. That’s typically good for precious metals because they’re priced in greenbacks. Add in the fact that a politically weakened President Trump may be less able to achieve pro-growth stimulus measures like tax cuts. Bond geeks say that could keep interest rates lower, which may also put the “bull” back in bullion.1

Options activity surged into the industry yesterday as traders adjusted bets and held out for further gains. One large transaction in Eldorado Gold (NYSE: EGO) was near the top of the list:

  • A trader unloaded an existing position in the May 3 calls, selling 5,500 contracts for $0.39.
  • At the same second, they purchased 5,500 of the June 3 calls for $0.48.
  • That translates into a net cost of $0.09 per contract.

Calls are options to buy a security at a certain price during a certain period. They can appreciate much quicker than common shares when a rally occurs but also go to zero if the stock doesn’t move enough or declines.

Eldorado Gold (FMSA), 6-month chart

Source: OptionsHouse by E*TRADE

Wednesday’s transaction essentially bought time because the investor now has an additional month for EGO to push higher. Don’t forget the May contracts they sold could be rendered worthless by a near-term drop below $3 because they expire this Friday. Shifting their capital to June can help protect against that kind of volatility.

EGO fell 1.48 percent to $3.33 yesterday, and is the only major gold miner to be down in the last week. That’s because it’s shelling out 77 million shares to acquire fellow Canadian miner Integra.2 The options trade looks like a bet the resulting dilution won’t remain a problem for long…

Barrick Gold (NYSE: ABX) is the world’s largest producer of the yellow metal. It also got some love on Wednesday – or at least flirtation – as traders amassed over 7,500 26-May 18 calls for $0.11 to $0.13. ABX climbed 0.88 percent to $17.11 yesterday. 

Bottom line: Traders have taken a shine to gold stocks as the political worries crystalize and the U.S. dollar craters.

 

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1. Reuters: PRECIOUS-Gold surges as Trump turmoil hits dollar, U.S. yields. 5/17/17.

2. Eldorado Gold Press Release: Eldorado to Acquire Integra Gold Corporation. 5/15/17.