Put Options Against Barrick Gold Only Tell Half of the Story

• The radar for unusual options activity put a spotlight on Barrick Gold, which is understandable given the rising interest rate environment.
• However, miners of precious metals are extremely difficult to gauge because monetary hawkishness is not guaranteed to last indefinitely.
• While short traders might win some near-term profits, the longer-term narrative might favor GOLD stock.

Faced with difficult waters to navigate, one of the most useful tools available is to monitor unusual options activity. Whenever traders pile into options – or contracts that provide the right but not the obligation to acquire the underlying stock at a predetermined price and time – at an unusually high level against expected norms, it may signal an important pivot in the market.

Following the close of the June 22 session, Barrick Gold Corp (GOLD) garnered some of the spotlight but for the wrong reasons. Specifically, traders saw an opportunity with the $19.50 put (bearish) options with an expiration date of July 15, 2022. Volume hit 4,081 contracts against an open interest reading of 110.

Unlike some of the other rumblings in the derivatives market, the pessimism toward Barrick Gold is understandable. Recently, the consumer price index (CPI) for May hit a blistering gain of 8.6% on a year-over-year basis, exceeding analysts’ expectations. In response, the Federal Reserve raised its benchmark interest rate by three-quarters of a point.

Not only that, all policymakers now recognize the severity of escalating prices. Therefore, it would not be out of the question for the Fed to continue its hawkish monetary policy until consumer costs are under control. By logical deduction, such an action would have a deflationary effect on the U.S. dollar, which natively would not be conducive for gold-related investments.

But could there be a contrarian argument at work here?

Near-Term Bet, Longer-Term Questions

Those who are tempted to follow the bearish implications of the GOLD put options have the wind at their backs for now. Keep in mind that the days to expiration for the aforementioned contract is 23, just barely over three weeks. During this limited period, it’s quite possible that GOLD stock could suffer further downside in the market.

Along with being deflationary for the dollar, the Fed’s actions have Wall Street analysts concerned that they could spark a recession. While the central bankers are aiming for a relatively soft landing, the major problem is that such circumstances are difficult to predict. Most likely, the fundamental backdrop is entropic: we simply have no playbook for navigating a post-pandemic and post-proxy-war economy.

However, bearishness for GOLD stock in the near term is not the same as pessimism for the long term. Historically, gold has long played the role of safe-haven asset. And with the volatile cryptocurrency sector proving to be a less-than-effective means of wealth preservation, the “analog” case for precious metals can rise once again.

As well, it’s also possible that the Fed’s efforts to contain inflation could fall flat. For instance, the expansion of the money supply is not the only catalyst for rising prices. Disruptions to global supply chains have also played a major role and if these issues aren’t resolved, what the Fed does might not matter as much.

Money Velocity is the Dirty Little Secret

Typical of the American political circus, both Democrats and Republicans are blaming each other for the hangover associated with the nearly $5 trillion in stimulus packages that Washington greenlit. With the midterm elections just around the corner, the vitriol is to be expected.

However, if we take a step back, both parties signed off on the handouts in a bid to save the economy from going under. Therefore, the argument isn’t about binary blame but rather magnitude of responsibility. Even then, the politics obfuscates the real heart of the matter.

According to the Federal Reserve Bank of St. Louis, the velocity of M2 money stock – or the rate at which each unit of currency circulates throughout the economy – slipped to 1.122 in the first quarter of 2022. At its lowest point on record (Q2 2020), money velocity registered 1.103.

Put another way, money velocity has only improved – after a mountain load of stimulus – by a margin of less than 2%. Needless to say, that is an incredibly poor effectiveness of monetary tools. It demonstrates at minimum that millions of Americans are scared to make too many waves.

Therefore, if the Fed goes overboard with its hawkish policies, money velocity could slip to even lower records. Such a crisis might cause the central bank to reverse course, which would be cynically positive for GOLD stock.

A Hot Potato

Perhaps the best way to describe the bearish trade for Barrick Gold is that it’s a hot potato. In the near term, most indications point to the Fed doing whatever it must to crush inflation or at least contain it. That may very well lower the GOLD stock price, thereby being profitable for speculators.

However, the longer-term framework for anything related to the precious metals is cloudy. True, gold has been disappointing relative to the underlying fundamentals. But it could still shine bright as a wealth preserver since the Fed is truly navigating uncharted territory.

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