Stimulus Talks Dusting Off Opportunity In Gold And Silver

How does this happen? Well, the Dollar Index or UUP looks at relative strength against a basket or currencies but with a 57% weighting to the euro. What happens when the European Central Bank is pursuing the same policy? They both go nowhere in relation to each other. Looking at gold, it shows that the dollar was, in fact, strengthening. This is because gold is priced in dollars. The initial impression is that the Fed got out in front of a potential crisis and wanted to own risk assets like stocks.

As QE began to recede, so did the appetite for risk. In this case, gold began to surge in early 2016 as massive liquidity injections meet waning growth. That’s what stagflation is all about.

Gold & Silver Option Activity

There were three trades that stood out yesterday in the gold space. Two of the trades were on physical gold and silver ETFs and one option trade on a stock. Here’s a breakdown of the activity:

  • SPDR Gold Trust (NYSEARCA: GLD)
    • 7,500 17 DEC 21 $190 calls bought @ $9.55
    • 7,500 17 DEC 21 $265 calls sold @ $1.51
  • iShares Silver Trust (NYSEARCA: SLV)
    • 4,000 8 JAN 21 $26.50 calls BOT @ $0.15 to $0.16
  • Kinross Gold Corporation (NYSE: KGC)
    • 11,000 18 DEC 20 $7.50 calls mostly BOT @ $0.04 to $0.06

The GLD trade was a long call vertical that is pricing in a move in GLD to $265 in the next year. The other trades are looking for more of an immediate move higher in the near-term. While I generally don’t like option activity with so little time to expiration like KGC, it does dovetail with the other activity with gold and silver.

Conclusion

The activity that happened yesterday in gold and silver is an early indication of a potential resumption in the bullish trend from earlier in the year. The catalyst is going to be an aggressive Fed, stimulus spending, and a lack of growth due to COVID-related policies. This potential confluence of events could provide a big spark heading into 2021, particularly for gold.

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