With gold (GLD) down sharply from their January all-time highs, I believe now is an interesting time to make a contrarian bullish bet via upside calls. The weakness in bonds, because of a more hawkish Fed and higher oil prices, has led to higher US yields and a stronger US dollar. A strong US dollar is a major headwind for gold and likely explains a fair amount of the weakness we have experienced of late. We have seen 10-year yields peak between 4.7% and 5% the last few times yields have spiked since the end of 2023, and if yields once again peak out at/near these levels, that should give a bid to gold.
10-year yields in the US have climbed from ~ 4% to just below 4.7% since the war in Iran started
10-year yields have peaked between 4.7% and 5% the last few times yields have moved up sharply
The US dollar index (DXY) has followed yields higher as well
As we head into the FOMC meeting and rate decision this week, I believe it make sense to consider owning 2-month (September) calls in GLD, as perhaps a lot of the negative news that could impact the metal is possibly already priced in? Looking at gold, we see a 28% decline from the Jan highs, and it is trading just above the YTD lows. So why the optimism? First, I like the fact that gold hasn’t made a new low since June 24th (over a month ago). The potential “double bottom” is forming, even as 10-year yields have continued to move higher (and oil has spiked once again). If gold has been able to hold those recent lows with bonds continuing to weaken, then I would fully expect to see a decided rally should we see a move back lower in yields (and the expected move back lower in the US$).
Gold (GLD) declined by ~ 28% from the Jan highs to the June lows, but has been able to hold those June lows as yields rise further
What I also like about the potential for gold to start to work higher again is the fact that after a massive outperformance to the equity markets (SPY) from the Aug 2025 lows to the Feb 2026 highs, we have seen gold underperform by over 30%, and that relative spread move back to just above the Aug 2025 lows. While only a subtle move, we have actually seen gold outperform SPY over the past few weeks, which could also be signaling a change in the longer-term move?
The GLD/SPY relative spread declined by over 30% from the Feb highs and is back to the recent support lows
Finally, against this backdrop, I am seeing 2-month 40-delta GLD calls trading just above their cheapest levels of the year and at a discount to where 60-day realized vol trades. This is a far cry from the spike we saw in January when people were bidding up the volatility in upside calls as gold was rallying sharply. The fact that you can own the defined-risk 2-month calls here, ahead of the FOMC and BOJ meetings this week as well as a slew of data in August, seems like a very interesting risk/reward.
GLD 2-month 40-delta call implied vol trading at the 2026 lows and at a discount to 60-day realized vol
Trade:
Buy GLD September 18th $395 calls for $5.20 (GLD $371.90 Fri closing ref)
Trade Details:
- Buying the 2-month 6% upside calls following the nearly 30% decline from the Jan highs
- Gold has traded lower on rising yields, which has led to a stronger US$ (could see both yields and the US$ trade lower from these levels)
- GLD upside call vol trading at the 2026 lows and at a discount to where 60-day realized vol trades (why I like the setup to own outright calls here)
- Can add the defined-risk calls to an existing long/bullish gold position, or as an entry-point trade given sharp pullback and attractive setup
- Please reach out to me or the 22V sales team for updated pricing and execution capabilities
