A Monetary Pivot Drives Unusual Options Activity for Barrick Gold (GOLD)
Following the spring doldrums of 2020, when the typically vituperative activity on Washington settled down to assess the damage of the COVID-19 pandemic, companies like Barrick Gold (GOLD) suddenly garnered tremendous relevance. On an unprecedented scale, the outpouring of fiscal and monetary support to save the American economy for the most part succeeded – at a cost of rising inflation. Now that the Federal Reserve seeks to mitigate the excess, GOLD stock faces serious questions.
Headquartered in Canada, Barrick Gold represents one of the biggest precious metals mining firms, featuring a market capitalization of almost $27 billion at time of writing. In the second quarter of this year, Barrick posted revenue of $2.86 billion (down 1.2% year-over-year) and net income of $488 million (up nearly 19% YOY). While presenting a solid profitability picture, the narrative for GOLD stock now depends on the Fed.
In late August, Fed chair Jerome Powell stated that inflation remains a vexing concern, requiring some painful measures to tackle rising consumer prices. Recently, Powell reaffirmed his commitment to attacking inflation, with the central bank raising its key interest rate by a substantial three-quarters of a point, according to the AP.
In so doing, the paradigm shifted from an inflationary environment to a deflationary one. Under the former framework, precious metals-related investments like GOLD stock benefitted. As the dollar lost purchasing power, assets commanding intrinsic value attracted investors.
However, under a deflationary environment, the opposite narrative rings true. Purchasing power (all other things being equal) rises, meaning that cash becomes a safe haven. Therefore, it’s not terribly surprising that GOLD stock became the subject of unusual options activity – and not to the bulls’ liking.
Bears Eyeball GOLD Stock for Long-Term Profits
After the dust settled on the Sept. 21 session, GOLD stock ranked among the most unusual in terms of trading activity in the options market. Specifically, traders piled into the $15 puts with an expiration date of Jan. 17, 2025. Put options rise in value as the underlying security declines in the open market.
Volume for the transaction reached 6,301 contracts against an open interest reading of 114. On Wednesday, GOLD stock closed at $15.18. Therefore, without taking into account other factors such as the bid-ask spread, the underlying security only needs to decline by 1.19% for the puts to be at the money.
Speaking of spreads, this metric as represented by the midpoint price ($3.21) came out to 15.26%. While a wide margin, there are 849 days to expiration from the time of this writing.
Though the circumstances surrounding GOLD stock present multiple fundamental concerns, so far, interest in the above put option contrasts with overall bullish sentiment for Barrick Gold. According to data from Barchart.com, GOLD features a put/call open interest ratio of 0.54.
Under most circumstances, a ratio of 0.70 represents the threshold where an equal number of calls and puts have been purchased (it’s not 1 because the market features an upward bias). Therefore, ratios below 0.70 reflect bullish sentiment, while above signifies potentially bearish sentiment.
Another peculiarity for market participants to consider before placing negative bets on GOLD stock is analyst ratings. In the current month, eight out of 13 experts rate Barrick as a “buy” (six strong buys, two moderate buys). The remaining five analysts rate GOLD as a “hold.”
Deflation Versus the Fear Trade
Fundamentally, GOLD stock faces significant pressure from deflationary forces. Worryingly, the AP reported that the Fed’s strategy for taming inflation could involve the following, “Slower growth, higher unemployment and potentially a recession.” Here’s what the AP’s Christopher Rugaber had to say:
Speaking at a news conference, Chair Jerome Powell acknowledged what many economists have been saying for months: That the Fed's goal of engineering a “soft landing” — in which it would manage to slow growth enough to curb inflation but not so much as to cause a recession — looks increasingly unlikely.
“The chances of a soft landing,” Powell said, “are likely to diminish” as the Fed steadily raises borrowing costs to slow the worst streak of inflation in four decades. “No one knows whether this process will lead to a recession or, if so, how significant that recession would be.”
The stark admission contrasts with earlier expectations that the central bank would be able to engineer a soft landing. Still, not all hope is lost for GOLD stock.
On the other side of the equation, the fear trade could boost gold-related investments. While deflation certainly represents a headwind for commodities in general, many view gold as a universal hedge against wild economic undercurrents.
Indeed, gold features a history that dates to the earliest human civilizations. In sharp contrast, the first Federal Reserve note was issued in 1963.
A Tough Call to Make
Based on pure numbers, the bearish thesis for GOLD stock makes perfect sense. The Fed is likely to raise rates until inflation comes down. In the meantime, this hawkish policy could sink economic activity, which would be deflationary for asset prices. Even central bank officials acknowledge these risks.
On the other hand, the volatility of the post-pandemic new normal means no logical deductions can be taken purely for granted. Therefore, a contrarian bullish argument for Barrick Gold definitely exists. Still, anybody interested in this trade must have incredibly strong conviction to follow through with it.
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