The precious metals ecosystem has been quietly rising to blistering highs. The push for investors to seek safe havens amid broader stability concerns has driven gold prices to record highs. For speculators, gold production specialist Gold Fields (NYSE:GFI) could offer a compelling trade. Even hedge funds are getting into the mix, making GFI stock enticing.
According to a CNN report, gold reached an all-time high in early April. The price of the precious metal has corrected since then. However, sentiment is starting to build back up, which has also carried the underlying mining sector. Over the past five sessions, for instance, GFI stock gained over 4%.
Central banks – particularly led by China – have been acquiring the precious metal in an effort to diversify away from the dollar. Further, gold has long represented a universal store of value. During times of upheaval and geopolitical uncertainty, the yellow metal may make sense as a defensive play.
However, what really captured the market’s attention was Michael Burry. Featured in the book and film, The Big Short, Burry’s hedge fund Scion Asset Management picked up shares of a mutual fund exclusively focused on gold.
Burry Bets Big on Gold
As TipRanks reporter Paul Hoffman mentioned, the U.S. Securities and Exchange Commission (SEC) requires large money managers to disclose their month-end positions in a document known as the 13F. Burry’s disclosure showed that he acquired shares of Sprott Physical Gold Trust (NYSEARCA:PHYS). Specifically, his holdings amounted to 440,729 shares, representing 7.37% of Scion’s portfolio.
If you want to play the gold game strictly as Burry is doing, PHYS is appealing because it’s about as close to owning the physical metal in “paper” form as you can get. Per Morningstar, 99.9% of the mutual fund is allocated to 400-ounce gold bars. The rest is in cash.
However, the mining ecosystem generally offers higher upside potential. Of course, it comes with greater risk, which makes GFI stock appropriate for speculators only. Still, with Burry so interested in the yellow metal, gamblers may have more confidence betting on the space.
Notably, Scion utterly dominated the competition. Since January 2016, the average hedge fund returned 35.9%. That’s much worse than the S&P 500, which returned around 193%. But Scion? We’re talking roughly 264%.
When Michael Burry speaks, it’s always worth listening.
Trade of the Day: Buy GFI Stock Call Options
With the sector endorsement of one of the best hedge fund managers out there, speculators may want to consider GFI stock call options. The trade of the day involves acquiring 21 June 2024 $18 call options.
To be upfront, it’s a high-risk, high-reward trade. First of all, GFI stock closed at $16.91 during the midweek session. The gap to the strike price is therefore 6.44%. Further, the bid-ask spread as represented by the midpoint price is rather wide at 9.43%.
Still, there are some reasons to be intrigued with the idea. Notably, volume was relatively high, hitting 622 contracts against an open interest reading of 1,515 contracts on Wednesday. Also, the implied volatility (IV) of the option sits at 43.58%. In contrast, the historical volatility (HV) of GFI derivatives is 48.23%. With the IV being lower than the HV, an incentive exists to buy the option (all other things being equal).
On a broader level, the backdrop for gold is robust. Central banks are buying the yellow metal, as are hedge funds like Scion. With even retailers selling (and selling out of) gold, the stove is red hot. The assumption, then, is that market sentiment will push GFI stock to fresh plateaus.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
