Gold And The Inflation Machine

(February 14th, 2022 - Brandon Chapman)

Today's unusual option activity and current events have helped make the precious metals trade even more desirable. Let's take a closer look.

Golden Dynamics of Stagflation

I mentioned the notion that current events may be helping gold, silver and precious metals stocks. It's probably obvious, but all of the talk of war with Russia is certainly a major catalyst. I've commented for many years that gold loves stagflation and what better toll for stagflation than war.

As we're discussing war with Russia, except when it's walked back, we're also dealing with a major shift in interest rate expectations from the Federal Reserve. For now, the unpredictability is helping gold as the dollar wavers with the potential of a Fed policy error. With CPI at 40-year highs, it will only pressure the Fed to potentially do more to get in front of the inflation threat. This has led to big time option trades in gold and silver since January 3, 2022.

While a major market decline is typically dollar positive and negative for gold, it's the near-term prospects that are shining right now and the likely policy decisions after a major sell-off that will help the gold trade shine into 2023. That's what the option activity is suggesting.

Gold Option Activity

There have have been two rather large bullish option trades on GDX today. Here is a break down of the activity:

• 50,000 17 JUN 22 42/45 long call vertical BOT in 1 print @ $0.20
• 62,100 16 SEP 22 45/50 long call vertical BOT in 2 prints @ $0.33 to $0.35

Both of these trades are lower probability and high reward/risk trades. Risking $0.20 a share to make $2.80 or $0.35 to make $4.65 means that you don't have to right a a lot. You may say that it's a hedge, but that doesn't really matter, it may be a great hedge for war, inflation and a policy error by the Fed.

The Technicals of Gold

The SPDR Gold Trust (NYSEARCA: GLD) made it's highest close since June 14, 2021 today. It's 0.55% advance showed up the 0.38% decline in the S&P 500, but paled in comparison to the 2.04% advance in GDX. With today's move, it appears that GLD may be poised to test the June 2021 high near $179.