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Today, we’re opening a new bearish trade on Barrick Gold (ABX). We believe that the European Central Bank’s (ECB) decision not to add to its quantitative-easing measures solidified resistance at $19 on ABX and that the stock is going to re-test support at $17.
As you might suspect, gold-mining stocks are highly dependent on the price of gold. When gold is rising, it’s good for gold miners because the higher the price they can fetch on the open market for the gold they pull out of the ground, the better their margins are going to be. Of course, the opposite is also true. When gold is falling, it squeezes gold miners’ margins. So why are we talking about the ECB when we’re looking at the price of gold?
Gold prices tend to rise when the values of major currencies around the world — like the euro (EUR) and the U.S. dollar (USD) — are falling because traders view gold as a safe store of wealth when other currencies are losing their purchasing power. However, because the ECB decided not to expand its QE program (and thereby further depreciating the value of the EUR), the EUR has started to recover. On top of that, the USD is also bouncing higher as traders price in the potential that the Fed is going to be raising interest rates again in 2016. All of this is pushing gold prices back down, which should continue to push the price of ABX lower as well.
Buy to open the ABX October 17 Puts (ABX161021P00017000).
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