Big trader takes a big risk on gold miners
On Tuesday gold prices once again moved up, to $1,375 an ounce, and are now $200 off of this year's lows. Its rally over the past few weeks has ignited a surge in shares of gold mining companies, which makes sense—they stand to benefit greatly from higher gold prices.
Today we saw one option trader step into the market and sell 10,100 Newmont Mining January 19-strike puts for $0.21. This is a bullish bet that Newmont, which owns some of the world's largest gold mines, will be above $18.81 at January expiration. But if (NEM) is below $19, then this trader will be "put" just over 1 million shares of stock at an effective price of $18.81, even if it is currently trading well below that level. So by selling a put, this trader stands to profit if the rally in Newmont shares continues, but has also committed to buying the stock on a pullback to $19.
Right now, the main factor affecting Newmont is the price of gold. Earlier this year, the precious metal saw record negative sentiment, and plunged into a bear market. However, sellers may have gotten ahead of themselves, because physical demand for gold remains exceptionally strong in Asian countries like India and China. This has led many traders to cover their short positions, which is driving up the price of gold.
Gold's recent rally has been good news for the miners, who must be sighing with relief. The $1,200 level is significant for miners like Newmont, because it is approximately equal to the average cost of production. Gold dipped below $1,200 briefly, but as long as gold remains above this level, there is room for miners to profit.
We remain cautiously long gold here. It has gotten a nice bounce out of oversold levels. However, the macro environment is not the most conducive to the long gold trade: Interest rates are rising, and the growth of the monetary base is decelerating. Because gold is a noninterest-producing inflation hedge, both developments are bad news for gold.
We are keeping our exposure to gold, and I am personally staying long the SPDR Gold ETF (GLD), especially with overall broad market fear rising in recent days. I am, however, only holding about 15 percent of the (GLD) stake that I normally would.
Some miners, like Newmont, might be good investments now. But traders have to keep in mind that gold has had quite a run, even in the face of challenging fundamentals.