Yen Carry Trade Collapse Puts Options Spotlight on Agnico-Eagle Mines (AEM)

Amid the market turmoil recently, very few investments have performed well. One sector that has gone against the grain in a positive sense is the aerospace and defense ecosystem due to worsening geopolitical conditions. Another arena that may enjoy bullish support is gold. Now, investing in physical gold has its challenges, which is why Agnico-Eagle Mines (AEM) may offer an attractive alternative.

To be sure, AEM stock doesn’t represent a direct play on the underlying precious metal. However, physical bullion imposes difficulties in terms of storage and protection, among other things. By putting funds in a gold miner, investors can potentially benefit from both the operational component as well as the broader fundamentals that bolster the metal’s spot price.

But why would gold or gold-related investments be of interest right now? Mainly, a global monetary policy pivot may help support the precious metals complex. In turn, AEM stock and its ilk may ride the sector’s coattails.

Specifically, the Japanese yen carry trade no longer provides opportunities for speculators. In prior paradigms, traders would borrow money in yen terms due to the underlying incentivization of extremely low interest rates. Subsequently, they would buy other currencies in the aim of extracting higher yields.

However, the Bank of Japan raised interest rates to combat the severe loss of yen value relative to the dollar. Suddenly, one of the most lucrative trades became a massive liability, leading to the yen carry trade unwinding.

Naturally, the CBOE Volatility Index or VIX spiked sharply higher as investor fears about an incoming recession dominated proceedings. Down the line, it’s possible that the Federal Reserve may have to do something to settle global markets down. Given the uncertainty of the matter, gold is looking mighty attractive – and that’s where AEM stock comes along.

Unusual Options Activity for AEM Stock Emphasizes Market Uneasiness

Of course, there are several publicly traded gold miners to choose from. However, AEM stock represented one of the most heavily traded ideas in the derivatives market. Specifically, following Monday’s closing bell, volume reached 9,733 contracts against an open interest reading of 179,470. The difference between the day’s volume and the trailing month average came out to 73%.

Drilling into the details, call volume hit 8,202 contracts versus put volume of 1,531 contracts. On paper, setup appears incredibly bullish due to the put/call volume ratio of 0.19. Calls give holders the right but not the obligation to buy the underlying security at the listed strike price.

Interestingly, though, a look at Barchart’s Options Flow screener – which filters exclusively for big block transactions likely placed by institutional or professional investors – revealed that net trade sentiment landed at $-77,000, favoring the bears. Total premiums for bearish-sentiment options reached $-294,700, while total premiums for bullish-sentiment options hit $217,700.

Put another way, the big players are willing to sell calls on AEM stock at various strike prices to make income from what they likely perceive to be a flat-moving asset. Generally speaking, it’s not prudent to bet against the institutional or professional players: they have the best people, resources and information to craft their tactics and strategies.

Nevertheless, the implosion of the yen carry trade implies that Japan’s currency may rise in value relative to the dollar. In turn, the greenback may weaken in response. Further, investors have long been eager for the Fed to lower the benchmark interest rate to soothe the burden of high borrowing costs.

The fundamentals seem aligned with an inflationary backdrop for the dollar. If so, investors may want to consider buying calls on AEM stock rather than selling them.

Valuation Concerns Need Context

One matter unrelated to broader fundamentals that may have contributed to hesitation against AEM stock is the valuation. Right now, shares trade hands at 5.06X trailing-year revenue. That’s noticeably above the running average over the prior year of approximately 4.2X. More importantly, the average price-to-sales ratio of the gold mining market is only 2.73X.

However, context matters. AEM stock is one of the elite ideas that Barchart has identified as a 100% Strong Buy. A high probability exists that shares will continue on their current (bullish) trajectory in the near term. Second, analysts agree that Agnico-Eagle should have strong performance in fiscal 2024, generating sales of $8.05 billion.

Assuming a shares outstanding count of 499.89 million, the multiple improves to 4.8X. Moreover, if carry trade dynamics and other impact points drive a dovish monetary policy for the dollar, it wouldn’t be surprising for Agnico-Eagle to post $10.2 billion in sales for fiscal 2025; that’s the high-side estimate.

In that scenario, AEM stock would be trading at 3.76X projected high-side sales. That’s still not undervalued objectively. However, operational strength and favorable fundamentals could potentially mix very lucratively.