We’re in the heart of earnings season, with some of the
biggest companies in the world reporting this week. Yet, almost all the focus
in the investment world is on gold and silver. After a long hiatus, it seems precious
metals are back in the limelight.
With the top Nasdaq-100 stocks like Apple (AAPL) and Amazon (AMZN) hitting all-time highs, investors may be starting to get concerned about valuations. That doesnt appear to be the case with gold, which doesnt trade on some sort of intrinsic value. Silver has more uses than gold as an industrial metal, but its also beginning to trade like gold has been trading.
Keep in mind, precious metals are more like stores of value
or currencies that commodities. Throughout history (literally 5,000 years or
more), these metals have been used as currencies or signs of wealth. To this
day, they retain value as defensive instruments.
In recent days, the U.S. dollar has really taken it on the
chin. The dollar has lost considerable ground versus other major currencies
such as the Euro and Yen. This is likely due to the long-term impact of
COVID-19, which has hit the US harder than other developed nations. As a result
of the dollar falling, money has been pouring into gold and silver.
For the year, gold is up 28% and has hit a record of nearly
$1,975 an ounce. Silver is up 37% so far this year, but is still just trading
around $25 an ounce (well below all-time highs). Can precious metals keep
going? As long as the dollar keeps heading south, its certainly possible.
From an options perspective, theres been a significant amount of activity in the VanEck Vectors Gold Miners ETF (GDX). GDX is up 49% this year so far, and at least one well-capitalized trader thinks the good times will continue through the summer.
With GDX trading for $43 a share, this trader purchased
September 48 calls for $1.48. The calls traded in a block of 5,400, which
amounts to around $800,000 in premium costs. That is also the max loss on the
trade if GDX is below $48 at September expiration.
Because it’s just a straight call buy, the breakeven for the
trade is at $49.48 at expiration. Max gain is unlimited. Since these calls are
$5 out-of-the-money, and because the trade wasn’t executed as a call spread
(lower cost but capped gains), it appears to be an extremely bullish position.
Should gold continue moving higher, gold miners could still
have significant upside potential. The last time gold prices were this high,
GDX climbed over $60 per share. That could be what this call buyer is expecting
over the next two months or so.
In other words, gold miners may be a better value than gold
itself, considering gold is at all-time highs and GDX isn’t close. GDX also
gives you access to several miners, so you aren’t just relying on one company
to gain exposure to gold.
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