Why Traders Are Betting Big on Gold and Defense Stocks Now

August 20, 2024 at 07:30 AM EDT

gold bar close up

Investors can find out where the market’s attention is headed in the near future through proper tools like volume scanners or options contracts filters. Recently, three stocks connected the dots under a common theme from Wall Street traders, one that retail investors would be smart to consider and follow today.

But, before digging into the leading cause and belief that drew these traders into call option trades for these stocks, investors need to understand what buying an options contract implies:

Puts and Calls: When buying a call option, the directional bet is that the underlying stock will move higher, and a put is a bet on the stock moving lower. This is the first caveat of an options trade.
Timing: Since options contracts have an expiration date, traders need to be accurate in both the direction and timing of the trade. If it takes too long to reach a target price, the contract can expire worthless.

Knowing that the stakes are higher when trading options, investors need to pay attention when unusual options activity is happening around a stock, and even more so for a common group of stocks. This is why connecting the dots for unusual options activity for the iShares Gold Trust ETF (NYSEARCA: IAU), backed by interest for Barrick Gold Corp. (NYSE: GOLD), and wrapped around by an additional trade in weapons manufacturer Lockheed Martin Co. (NYSE: LMT).

Goldman Sachs Predicts New Highs for Gold Prices

That’s good for the iShares Gold Trust ETF since investors can get direct exposure to the price action of precious metals without buying futures or physical gold. Analysts at Goldman predict that gold prices can reach up to $2,700 an ounce this year, a view backed by falling fiat currency valuations.

Most investors might not realize that a significant driver of U.S. dollar valuations is the direction of interest rate policy. With the Federal Reserve (the Fed) looking to cut interest rates before the end of the year, the dollar’s value might be facing a downtrend in the coming months.

According to the CME’s FedWatch tool, these cuts are predicted to be here as soon as September 2024. Because gold is quoted in U.S. dollars, a fall in the dollar’s value has a direct bullish effect on gold’s price, which is probably why traders felt comfortable buying call options for this ETF now that the timing of the trade is clear-cut.

Barrick Gold's Strong Quarterly Results Fuel Trader Confidence in Gold Bets

Here’s what’s interesting and probably why traders chose to buy call options for Barrick Gold stock. While the price of gold has risen to new all-time highs, Barrick Gold stock has yet to break above its 2023 highs, creating a potential arbitrage opportunity for these traders to profit from the catch-up.

Investors can find further evidence of bullish sentiment by looking deeper into the company’s latest quarterly results. Management guidance sets the pace for the rest of the year, citing more production underway with lower costs attached to it.

These are the ingredients for an expansion in what matters most for investors: earnings per share (EPS).

Wall Street analysts now forecast up to 31.9% EPS growth in Barrick Gold for the next 12 months, a view rooted in management’s guidance and the company’s recent financial momentum. CIBC also landed on a price target of $27 a share for Barrick Gold stock, daring it to rally by as much as 37% from where it trades today.

More than a price action discount, investors can find Barrick Gold stock trading at a valuation discount compared to peers. On a price-to-book (P/B) multiple basis, Barrick Gold trades at only 1.1x, which is the average valuation for the basic materials sector set, which is 3.5x.

A Flight to Safety Means Lockheed Martin Stock Gains as Investors Seek Protection

Investors refer to more gold demand as a flight to safety, which directly implies that dangers lurk around the world and the market. These dangers take the form of geopolitical tensions that could lead to conflicts, especially between the United States and other powerhouses like Russia and China.

Building on this sentiment, governments and investors are flying to gold as insurance, but traders also chose Lockheed Martin stock as a potential way to profit from any breakout in volatility caused by global events.

After rallying by nearly 20% on the most recent quarterly earnings announcement, Lockheed Martin stock investors realized there must be more upside to be had in this stock, which is also a sign of the flight to safety trade.

Wall Street analysts now forecast 7.8% EPS growth for the company in the next 12 months, but that might be understating the company’s actual earning power.

Free cash flow (operating cash flow minus capital expenditures) grew from $771 million to $1.5 billion over the past 12 months, a more accurate measure of any business's earning power. Seeing this growth, management guided for higher sales and net orders (a backlog that is now $158.3 billion) for the rest of 2024.

Analysts at Bank of America decided to stand out from the pack and recommend this stock as a buy. With a price target set at $635 a share, they dare the stock to rally by as much as 13.4% from where it trades today.

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Why Traders Are Betting Big on Gold and Defense Stocks Now

Goldman Sachs Predicts New Highs for Gold Prices

Barrick Gold's Strong Quarterly Results Fuel Trader Confidence in Gold Bets

A Flight to Safety Means Lockheed Martin Stock Gains as Investors Seek Protection

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