Trader Q&A: Gauging Gold's Breakout

GDX has more than doubled off its March lows

by Bryan Sapp

Published on Jul 29, 2020 at 3:36 PM
Updated on Jul 30, 2020 at 8:18 AM

Back in March, Senior Options Strategist Bryan Sapp penned a fascinating study on VanEck Vectors Gold Miners ETF (GDX). Sapp ascertained that the sharp pullback in the safe-haven asset presented an intriguing buying opportunity. 

Fast forward four months, and gold is soaring at a breakneck pace. GDX is up 49% year-to-date, and has more than doubled off its $19.68 level it sat at when that first article was published. It seems fitting then, to check back in with Sapp and discuss the recent gold price breakout, what it means for options traders, and how to approach the next few months.

Can you offer up a quick breakdown of the investor sentiment surrounding gold?

BS: We are facing extremely bullish sentiment toward gold prices and GDX right now. Even the gold bears --and there were plenty back in the spring -- have turned into bulls in the past two months. 

Are there any short-term risks looming?

BS: Of course. Any time there's a Federal Open Market Committee (FOMC) there is always a risk. Even though today's decision to keep interest rates steady led to another record high for gold, it's a cyclical event to monitor. Comments from Fed Chair Jerome Powell also give the breakout a reason to pause, so it may make sense for gold bulls to lock in some gains prior to such a market-moving event as a Fed meeting.

What about technical indicators?

BS: GDX's 14-day Relative Strength Index (RSI) sits at 75 right now -- firmly in overbought territory. This is definitely an indicator gold could be due for some mean reversion in the short-term.

The second stimulus bill is facing some gridlock in Washington D.C. What should gold traders be looking for from that?

BS: Back in March, the fiscal and monetary measures currently being taken were extremely lucrative for gold and miners. Now, the new stimulus appears to be missing the bar (with regard to expectations), and is coming in lower than expected. Additionally, it appears that Democrats will likely fight the passage of it, as Republicans are attempting to tie some military spending programs to the bill. Any delay or watered down version of stimulus could act as an additional headwind for the “safety” macro ETF.

Back in March, you referenced operating expenses as a catalyst as well. What's changed since then?

BS: Operating expenses for miners remain very low, as fuel costs haven’t risen much at all. This could continue to keep profitability metrics high for miners.

What are some options-specific methods, if any, for getting in on any possible mean reversion?

BS: Given that miners have seen a huge run and many market participants are very bullish at this point, option implied volatility is currently very high.  A good way to capitalize on this if you’re expecting mean reversion would be to sell short-term out of the money call spreads. And while I’m still bullish long term on gold and the fundamental backdrop remains strong, near-term implied volatilities and excessively-bullish sentiment make this a good way to play a short-term pullback.


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