With the recent blowout in yields since FOMC from 4% to north of 4.5%, Gold has rallied over 6%.
Historically gold has been trading inversely to real US treasury yields, particularly at the long end of the curve. The logic was that if real yields rise, gold struggles as it becomes more expensive to carry the commodity and the opportunity cost of forgoing a real USD yield resulted in negative absolute USD returns for gold. This correlation ended in 2022 because it started to get bought up as a hedge by nations who aren’t on great terms with the United States, especially after the invasion of Ukraine and the subsequent confiscation of Russian assets. The long term and even shorter-term break in historic correlation between yields and gold screams a Gold BULL MARKET to me, and those kind of runs usually end in a phase of euphoria.
The extended length of speculative net positioning in Gold does give me a pause. But the current geopolitical scene negates my concern as a potential escalation between Israel and Iran can shake things, especially with Israel retaliating to Iran’s retaliation to a previous Israeli retaliation…. an endless doom cycle. I wouldn’t be surprised if Israel attacked Iran later this week during the Jewish holiday of Shemini Atzeret between October 23-25. In 2023, Shemini Atzeret fell on October the 7th. The mass media made sure we connect that date to certain event. I might be superstitious, but I think Israel might attack Iran during that holiday, if not at any time before the US election. Although this view has become mainstream after a leaked document from US Intelligence giving away Israel’s plans. Leaked documents show US intelligence on Israel’s plans to attack Iran, sources say | CNN Politics. As a contrarian, this makes me a tad uncomfortable but blowoff moves usually happen when the sentiment aligns with it as it tends to conclude the longer-term bullish action.
The potential bid in gold also lines up with historical precedents, especially after Gold was freely traded after Nixon took the US Dollar off the Gold Standard in 1971. It usually catches a bid during highly tense geopolitical events. Here are some examples:
I am very concerned that Israel/Iran pops off in the coming couple of weeks. When I think it through, nearly all signs point to Israel hitting Iran before November 5th and hitting them hard. It’s close enough to the election that oil won’t impact the gas pump because of the 3–4-week lag from futures to the retail pumps. First, incentives: literally everybody wants this except US enemies (China/Russia). Bibi’s popularity went from zero to all-time highs because of the war. Even his political rivals use imagery like “now that we have cut the arms, it is time to cut the head of the octopus.” When your rivals want this, and you want this, and the population just wants it done already — it’s going to happen. The Saudis also want this. They were weeks from a deal with Israel when Iran greenlighted Hamas on Oct 7th to snake that deal. US neo-cons have wanted this since Bush. China doesn’t want this, but staying as “neutral” as they can be under the circumstances if Saudis promise cheap oil perhaps? I am not sure.
Now to timing – why now? If Trump wins, then he can blame Biden – “I would never have let this happen but I’m a friend of Israel and now that we are in the $%&#, we have to support Israel 100% and win.” Trump would do a deal and enforce sanctions in 1Q25 before choosing to go to war, so if Israel wants to hit Iran, it has to be before he is President — AND before being elected — because Biden is checked out anyway and Donald is acting de facto meeting world leaders. Hitting Iran without his blessing after he’s elected would be a problem. For Kamala, sure she wants to win Michigan, but similar deal as President-Elect if she wins…”I didn’t want this and you didn’t check with me first” if it’s November/December, but if it happens before the election, then she can blame Biden and just outsource everything starting in January to the generals under cover of “deferring to the experts.” The overall problem is waiting for November-December ahead of inauguration will be viewed as screwing with the incoming candidate’s policy stance…Bibi shouldn’t defer to a President-elect anyway, after all Biden is technically still President and sent the THAADs …but it has to be now.
Now my real issue is the consensus around “escalate to deescalate”… 97% of conversations I have had on the above over the past 10 days have expressed shock and surprise, like “whoa you really think it’s right now?” Vast majority of people also think Israel will hit like April drones tit-for-tat “escalate to deescalate” all over again. This is in the market. Right now, right here, you can own the active gold future Dec24 GCZ4 calls that expire on Monday Nov 4th, the day before election day, $2900 strike (5.5% OTM), capturing two weekends of bombing risk — for $1/oz. A DOLLAR!!!!! Think of how INSANE that is as someone who lives in the tails and thinks about non-linear gap risk. Then layer in strange silence about the 200 missiles Iran sent at the beginning of October — well more than half made it through, and the hits were PRECISE. Runways. Depots. They didn’t land like 1990 Iraqi Scuds in the sandy desert. The capabilities here are real — Iran is not helpless. If Israel goes on tilt for several days on end, hitting missiles, Ministries, and oh how about Mullah houses because after all a stealth drone hit Bibi’s house (coincidentally when he wasn’t home and usually is…) … which gives cover for Israel to tit-for-tat the homes of the chiefs. Imagine we live in a world where it’s Day 4 of relentless sorties and several leaders are dead? But yeah, sell me $2900 Nov 4th calls for $1, seems like it’s smart vol harvesting…oh by the way, the implied vol on that option is 17. Sorry for the rant but trades like this — even obvious visible ones — sometimes come along with severe mispricing.
These moves tend to be fast, and I am betting that this time is no different. But I’ve been wrong plenty.
$GLD 11/01 $260 call sells for 45c. I’ll be digging there.
HANNIBAL
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