We’ll break down the rally in gold, why gold miners have been trailing it and the options trades I’m putting on from here accordingly. Investing in gold and silver mining companies, rather than purchasing the precious metals has frequently been promoted as a way to get “leverage” to the price of gold or silver. The logic is that investors in the mining companies are tapping into the financial performance of the enterprises that find, and develop natural resources rather than speculating on the price of the underlying commodities themselves. @GC.1 1Y mountain Gold 1 year In theory, a well managed business involving those most intimately familiar with the industry and the markets for the products they sell will be able to deploy capital more intelligently depending upon how market conditions change. The reality has proven a bit more complicated. Will miners catch up? Of course gold miners “fortunes” are tied closely to the market price of the commodity they sell – the correlation coefficient is nearly 80 – but it may surprise many to learn that the mining companies stocks have actually lagged the price of gold. Notice that the share price of the VanEck Gold Miners ETF (GDX ) tracking the companies, has declined more than 15.5% since the highs in April of 2023. Newmont Corp , the largest constituent has fallen more than 30%, even as the SPDR Gold Shares , tracking the commodity, has actually risen slightly over 6% during the same period. GDX GLD mountain 2023-04-13 VanEck Gold Miners ETF (companies) vs. SPDR Gold shares ETF (commodity) It should be said that GDX and Newmont Corporation pay dividends, whereas gold itself does not. In fact, in 2009 Warren Buffett when asked about his five-year forecast said of gold, “I have no views as to where it will be, but the one thing I can tell you is it won’t do anything between now and then except look at you.” A knock on investing in the metal he’s made many times over the years, that it is not, in and of itself, a productive asset the way a business can be. So what accounts then for the relative underperformance of the miners to the metal? In a word, it’s costs. Mining is a complex, labor and capital intensive business. Consumers certainly have seen the cost of inflation. Their wages may have risen, but if the cost of the goods they purchase have risen by as much or more, their situation has not improved. Between January 2018 and December 2023, gold rose by greater than 50%, but the cost of revenue for Newmont rose by more than 60%. Additionally gold miners are sometimes located in suboptimal geographic locations/jurisdictions where they may be subject to geopolitical factors beyond the price volatility of the commodities they produce. Nevertheless, I believe the miners are better able to face these challenges than politicians in Washington and elsewhere will face their fiscal profligacy, a lack of which is not particularly encouraging for the currencies they print and spend indiscriminately. This lack of discipline, while bad news for the dollar, should be good for commodities priced in them, such as gold and silver. I therefore like both the metals and miners, although they haven’t demonstrated outperformance over the past several years, if their cost inflation merely keeps pace with gold, rather than exceeding it, they could at long last begin to catch up. The trades Gold itself has risen very sharply over the past few weeks, so chasing it here is difficult. I would instead favor buying calls that expire in June or beyond such as the GLD June 205 calls, which are about $4.85/contract, or just over 2.4% of the ETF price. These stand to profit if the sharp rally we’ve seen recently continues while the risk is limited to the $4.85/share (x 100 as each contract represents 100 shares), in the event gold pulls back. If it does pull back I would then look to sell downside puts around the $190 strike as this was the level from which it broke out. Another way to visualize an option payoff diagram is to turn it on its axis relative to a price chart/time series in the underlying: Alternatively one could consider investing in the miners via the GDX ETF. Because the implied volatility of the miners is higher than the metal, I would favor a spread, such as a call spread risk reversal. Illustrated below is a June 28/31/34 call spread risk reversal. Selling the June 28 puts to help finance the purchase of the 31/34 call spread. 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