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Why Unusual Options Volume for Kinross Gold (KGC) Points to a Strong Opportunity

Barchart - Mon Mar 20, 2023

Many if not most times, it’s difficult to figure out what the market anticipates. Still, regarding unusual options volume for precious metals-mining firm Kinross Gold (KGC), a solid opportunity for potentially significant upside emerged. With fears associated with the recent banking sector fallout rising, KGC stock might be both a sensible safe haven and a rational pathway for speculation.

By now, everyone paying even modest attention to current events has learned about the bank runs and subsequent failures of two major financial institutions. And while the U.S. government essentially pledged to protect depositors’ funds, serious jitters remain in the investment markets. Last Friday, the benchmark S&P 500 closed down 1.10%. After an auspicious start to the new year, the index is up only 2.42%.

For KGC stock, it’s quite the opposite scenario. Heading into last weekend, it gained nearly 8% of equity value. And while it’s down 3.28% on a year-to-date basis, it’s on a resurgent track. In particular, last week, Kinross shares soared almost 12%.

Adding optimism to KGC stock, it represented a positive highlight in Barchart.com’s screener for unusual stock options volume. Specifically, volume for the mining enterprise hit 52,621 contracts against an open interest reading of 317,291. The delta between the Friday session volume and the trailing one-month average volume came out to 452.05%.

Moreover, call volume reached 42,957 contracts against put volume of only 9,664. As a result, the put/call volume ratio pinged at 0.22, which on paper favors the bulls. And this might not be a one-off move.

Fundamentally, gold historically jumped on inflation concerns. However, this time around, the yellow metal may rise on the fear trade. With people genuinely anxious about protecting their wealth, gold’s intrinsic value may storm to the forefront. If so, KGC stock presents a viable upside opportunity. Here are three reasons why.

Gold Tied to a Real Commodity

Typically, gold attracts criticism from many financial advisors because it’s a zero-yielding asset. Owning gold – or owning gold-related investments like KGC stock – largely comes down to speculation of the underlying asset. If demand rises, you can potentially benefit from capital gains. However, if demand falls, you must wait for a bullish rebound or sell at a loss. Without passive income (dividends), investors incur an opportunity cost.

However, unlike the high-level wizardry of the modern financial ecosystem, gold is a real commodity. It’s not just going to arbitrarily disappear due to speculation or the follies of artificially generated panic. Of course, being a physical commodity means that gold is static – there’s not a whole lot one can do with it, unlike the Federal Reserve and the market value of the U.S. dollar.

Nevertheless, during periods of extreme fear, gold looks awfully attractive. Therefore, with KGC stock providing a convenient form of exposure to the yellow metal, its value could swing higher on the chaos.

KGC Stock Provides a Sensible Safe Haven and Rational Speculation

While the fear associated with the banking sector meltdown has many people avoiding risk-on assets, the chaos also incentivizes specific members of this broad category. For instance, the cryptocurrency sector gained incredible momentum over the weekend as, in theory, a decentralized distributed financial ecosystem offers a clear alternative to a centralized fiat monetary system.

Still, this idea could be flawed, in part because the opposite of a failed policy does not necessarily equate to a correct solution. As well, decentralization has its own problems. For instance, it’s not a novel concept, having been tried before throughout American history. In addition, decentralized transactions offer no recourse if something goes awry.

However, with gold, we’re talking about an intrinsic value whose recognition of such extends back to the history of human civilizations. Moreover, its physical status provides plenty of reassurances. Again, gold isn’t going to “fail” without warning like seemingly the two banks recently did.

In that sense, gold simultaneously offers a safe haven as well as a form of speculation that it can rise while other asset classes plunge. That could be very attractive for scared investors.

Kinross Gold Could Be Undervalued

Specific to KGC stock, it could be undervalued against certain financial metrics. For instance, the market prices KGC at a trailing book value of 0.88. As a discount to book, Kinross ranks better than 72.1% of the metals and mining industry. Also, KGC trades at 5.22-times operating cash flow. In contrast, the sector median value stands at 7.43 times.

To be fair, Kinross has some work to do. Notably, it has a less-than-stellar balance sheet, which is saddled with debt. Also, the company’s Altman Z-Score sits at 0.05 below breakeven, indicating a distressed enterprise. Operationally, its three-year revenue growth rate sits at 0.2%.

However, the deflationary events of 2022 (i.e. rising interest rates) hurt KGC stock significantly. Nevertheless, the paradigm may have shifted with the banking sector fallout. With the fear trade back on, Kinross may fly higher.



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On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.