The Options Market Building Bullish Case for Gold Stocks

If there is one thing that gold and gold stocks like, it’s stagflation. Stagflation is when growth is flagging, and debt and monetization are rising. While the Fed is on the path of tightening in the coming year, the spigot is still open and the raising of the debt ceiling is certainly not deflationary. With all the labor issues, COVID restrictions and supply chain bottlenecks in play, the economy isn’t in a great position for real growth. With all that in mind, it seems the option market has been turning more bullish.

Gold Option Activity

One of the areas that unusual option activity generally does well is providing signals for gold and gold stocks. Over the past week, there has been clear interest building in the SPDR Gold Trust (NYSEARCA: GLD), VanEck Gold Miners ETF (NYSEARCA: GDX), and even in stocks like Barrick Gold Corp (NYSE: GOLD). The level of the bullish activity stepped it up a little more with today’s trade in GDX.

Here’s a breakdown of the significant activity in GDX:

• 10,300 21 JAN 22 $33 calls BOT mostly in 1 print @ $0.97
• 10,300 21 JAN 22 $38 calls sold mostly in 1 print @ $0.24 to $0.25

For the JAN $33, the volume was clear opening activity since the volume was greater than the open interest. However, the same cannot be said for the JAN $38 calls, which has over 16,000 open interest. While the order is a vertical spread, the trade could be a roll down of the $38 calls to the $33 calls.

Whether it’s a roll down or a vertical, the indication is bullish. It’s still a bullish roll because the trade is being done as a debit and reflects renewed bullish interest in GDX and is trying to reconnect with the price with a higher delta option.

Gold Technicals

While the option activity is pointing to bullish movement in gold heading into 2022, there are headwinds currently for the market and gold. The most prominent is the U.S. dollar. While the raising of the debt ceiling is inflationary, it’s only by a small margin and the potential downside is still present that may create a global bullish run on the U.S. dollar. Nonetheless, the near-term upside is still there and it may expand as we move into next year.

(Click on image to enlarge)

Looking at the chart of GDX, $38 seems a long distance from its current price of $30.41. The reality is that it can reasonably get there, but there are risks. Looking at the current retracement, the price is currently sitting on the 38.2% Fib retracement of the September downtrend. The potential in the coming weeks would certainly be a testing of the 61.8% Fib level near $32 and possibly higher. To the high near $34.

Conclusion

It’s been tough for gold and gold stocks as the U.S. dollar has perked up on the potential that the Fed may taper and, heaven forbid, raise rates. However, there have been small windows of opportunity that open for gold and this may be one of them. While the bullish move may be temporary, the potential for gold to outperform the S&P 500 is fairly good right now.