Barrick Gold ($GOLD) lagging competitors YTD. Short term opportunity?


Now I’m not going to pretend that I’m an expert with gold miners (honesty I don’t think anyone can accurately value this industry, just read Barrick’s latest investor presentation which goes into detail about their mining process, it’s extremely complicated) or here to present a 10x opportunity. I’ve been closely following gold prices for a few months and have seen a lot of discussions around the relationship between inflation and a potential increase in interest rates which would negatively impact gold as investors seek better risk-adjusted yield opportunities in bonds.

Despite interest rate concerns, I still believe gold is a decent hedge since SPY keeps hitting new all-time highs every week. The Fed continues to reassure the market that interest rates won’t move until late 2022 at the earliest. In my opinion, inflation may run hot for the next year giving gold a decent tailwind. I know this is a simple macro overview, but let’s move on to the trade opportunity.

I have noticed recently that Barrick has been lagging its major competitor Newmont this year, why? It already traded at a lower multiple compared to Newmont at the start of the year which makes sense as it has lower operating margins/growth expectations. There doesn’t appear to be an explicit reason for the relative dispersion between the 2 companies’ share price YTD when they have historically been very correlated.

Here are my 2 potential strategies:
1 Target Price Realization: Go long $GOLD common stock while selling monthly calls 5-10% above purchase price. Current monthly implied volatility shows about 2-3% monthly premium. Not bad. If I get assigned first month, would re-enter.
2 Pairs Trade: Go long Barrick ($GOLD) and short Newmont ($NEM) until both securities revert to their mean averages of the past 5 years (89% correlation).

In summary, I strongly believe there is a 15-20% short term opportunity here which may not be groundbreaking but still outperforming the broader market if this mean reversion occurs <1 year. Which strategy would you implement?


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