While not wanting to harp on the same theme, the strong and consistent interest in gold-related investments such as Kinross Gold (KGC) deserves attention. Following the frenzied price action linked to the failures of two regional U.S. banks, Wall Street apparently believes the worst is behind us. Still, if that were really the case, the strong rise of KGC stock presents a distraction.
For one thing, the market performance of the generally speculative – it is priced under $5 after all – KGC stock is quite remarkable. Up until early March, Kinross appeared headed for the dumpster, which isn’t surprising given the hawkish monetary policy environment. However, amid the banking sector fallout, KGC outperformed, gaining almost 26% in the trailing month. In contrast, the benchmark S&P 500 gained less than 2% during the same period.
Second, KGC stock represented one of the highlights for unusual stock options volume. Following the close of the March 31 session, volume for Kinross options reached 81,868 contracts against an open interest reading of 371,869. Further, the delta between the Friday session volume and the one-month average volume came out to 513.57%. Drilling down, call volume hit 77,728 contracts versus put volume of 4,140.
For additional support, KGC stock represented one of the points of intrigue that other resources caught. For instance, Zacks Equity Research stated that investors should pay close attention to Kinross because of the implied volatility dynamics in KGC earlier in March. Several days ago, I identified potentially bullish implications regarding KGC’s unusual options volume.
Nor does KGC stock represent the only gold-related investment attracting significant interest in the derivatives market. Previously, I discussed B2Gold (BTG) and its large spikes in call option volume levels. Because of the commoditized nature of the key asset underlying Kinross and B2Gold, it’s difficult to believe so much of the “smart money” is interested in precious metals – unless astute investors believe something’s not quite right.
Bullishness Toward KGC Stock and Gold Trades is Not a Great Sign
Barchart contributor and commodities trader and analyst Andrew Hecht recently noted that the gold spot price may continue along its bullish trajectory. Among one of Hecht’s arguments is that the pattern of higher lows and higher highs holds, which may bode well for the yellow metal. Of course, that’s great news for KGC stock and its ilk.
However, it’s not so great for the rest of the economy. I’ve said this before and I’ll say it again: gold is a “dumb” commodity.
While it’s valuable, it’s obviously a static asset. By that, I mean gold hires no workers, generates no earnings and pays no dividends. By simply buying and holding the asset, investors have no other way of making a profit other than through hoping the asset rises above the purchase price (excluding other factors such as bid-ask spreads) and subsequently selling it.
To be fair, mining enterprises like Kinross do hire people. Kinross also happens to be profitable and does pay a dividend. At the same time, if the gold market suddenly tanks, the mining industry will most likely feel the heat. Therefore, gold and its associated businesses present relatively high risk for investors.
What’s worse, the Federal Reserve remains committed to tackling stubbornly high inflation through interest rate hikes. With the central bank signaling that inflation left unaddressed may lead to significant economic consequences, Wall Street should understand that future monetary policy strategies will likely be net negative for gold.
And yet, the historical safe-haven asset continues to rise, taking mining investments like KGC stock up with it. To me, that’s a massive signal that not all is well with the broader financial ecosystem.
Another Worrying Indicator
According to a Yahoo Finance article posted last Friday, “[d]epositors drained another $126 billion from U.S. banks during the week ending March 22, according to new Federal Reserve data. This time the outflow came from the nation's largest institutions.”
It’s difficult to determine where this outflow eventually went to. However, the implication that people are pulling their funds out of the country’s most resilient financial enterprises should be both a warning sign and a confirming indicator regarding gold’s upswing. Apparently, some folks find that holding onto their money directly may be a safer bet than storing it in a big bank.
So no, I can’t in good conscience state that I believe the recent banking sector fallout is behind us. To be clear, I’m not suggesting that investors panic and do something silly. Responding emotionally to circumstances whether that be financial or something else rarely yields positive results.
But to state with authority that the economy cleared a major hurdle and that it’s blue skies ahead from here on out? In my view, there’s more than enough evidence to suggest that the smart money doesn’t fully believe in this rosy forecast.
On the date of publication, Josh Enomoto did not have (either directly or indirectly) positions in any of the securities mentioned in this article. All information and data in this article is solely for informational purposes. For more information please view the Barchart Disclosure Policy here.
