If you thought this year’s performance in gold has been rough, then avert your eyes from gold stocks. Unfortunately, they’ve been even worse. Thus far, the S&P 500 is up 21% for 2021. Meanwhile, gold prices are down 5%, and gold miners are down 10%.
But here’s where the depressing tale of precious metals turns. In the wake of last week’s comments from Jerome Powell, the yellow metal is percolating.
If ever there was a time to bet on a bottom, it’s now. The technical posture of gold stocks is starting to look up. Demand is increasing (if slightly), and signs of accumulation are mounting. We’ve seen a rotational market all year long, with investors eventually warming to out-of-favor areas. The message from today’s price charts suggests it could be gold stocks’ time to shine.
But even if they don’t, I’ll share three options trade that will profit provided these tickers simply stop going down.
After a brief look at each chart, I’ll share how to build each position.
Gold Stocks to Bottom Fish: Gold Miners ETF (GDX)
I’m a fan of using exchange-traded funds (ETFs) as our vehicle for nearly all sector-focused pitches for the simple fact that they offer an easy, diversified way to play. It allows us to sidestep picking individual companies and avoid their accompanying idiosyncratic risks. While there are multiple ETFs designed to track gold stocks, none is as liquid as GDX.
Here’s what I like about its posture.
First, we’re sitting near a major long-term support zone at $31.
Second, two large accumulation days formed over the past two weeks to show big buyers wading in.
Third, a higher pivot low and higher pivot high formed to confirm a subtle shift in the short-term trend direction.
The Trade: Sell the October $30 put for 41 cents.
Barrick Gold (GOLD)
Barrick Gold closely tracks the aforementioned gold miners ETF. As such, its price chart and the bullish arguments remain the same as that just outlined, with perhaps two key differences. First, GOLD is 50% cheaper than GDX ($20 versus $30), offering a lower-priced option. Second, GOLD is ever so slightly more volatile than GDX. This implies you’ll get slightly more premium (and thus a higher return on investment) by selling Barrick Gold puts over GDX.
We are again sticking with an October option because of the higher rate of time decay associated with short-term options. Indeed, the contracts that expire on Oct 15 sit exactly 45 days to expiration which is the sweet spot for selling options. As for strike selection, I like the $19 put option because it offers a low enough delta but a high enough payout.
The Trade: Sell the October $19 put for 38 cents.
Gold Stocks to Bottom Fish: Franco Nevada (FNV)
The third and final submission for today’s gold stocks gallery is ideal for traders looking to reward relative strength. While its industry has been plumbing the depths, FNV shares have been climbing. As a result, it’s one of the only big gold companies in the green for 2021.
This month’s plunge in gold prices did pull FNV prices below the 50-day moving average, but we’ve since firmed up.
I like the double bottom pattern at $140 and believe that the support zone could hold. To respect the recent break of the 50-day, however, we’re going to build another high probability cash flow play instead of a directional one.
The Trade: Sell the October $135/$130 bull put spread for 80 cents.