“Bull-markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria.” -Sir John Templeton
Gold has been on a tear lately. It has reached all-time highs, and it has even outperformed stocks over some impressive time periods. There are a lot of drawbacks to Gold despite the emotional security blanket it provides. It doesn’t pay dividends, it doesn’t grow earnings, and it is a pain to physically possess. Gold is often seen as an inflation hedge, and inflation is largely in the rearview mirror. A strengthening dollar, if persistent, will also prove a headwind to the precious metal.
One of the main reasons why I’m comfortable getting short Gold at these levels is because the bull market is heating up. When a bull market heats up, it creates FOMO in a lot of assets at the expense of Gold. The current bull market we are in just turned two, and given historical properties of other bull markets, this is a positive harbinger. Gold simply loses appeal in the heat of a bull market, and the Fed’s 50 bps cut got Gold supercharged. Now a more measured FOMC should help slow the parabolic rise of the world’s favorite precious metal.
On a tactical level Gold seems overextended, and just bumped up against key resistance. As we’ve discussed thoroughly at Punk Rock Traders, we think the geopolitical risk associated with Iran and Israel should largely blow over. This is negative for the price of Gold.
Israel will likely attack Iran’s military in a directly proportional response to the ballistic missile attack and will shy off attacking oil fields or nuclear facilities. We suspect the attack will occur after the US Presidential election. The arrival of the US THAAD system also suggests that Israel still is listening to its primary strategic benefactor who wants peace and stability in the region.
We are always looking for evidence for which way the wind is blowing on the macro condition of markets. Right now, it’s difficult to see too much that would derail positive seasonals in a bull market. Earnings have been positive this season, so far (including $TSM’s blowout report today that has sent our trade of the week from September 19th soaring). If this bull market continues Gold will lose its luster, relative to other assets which should start heating up in terms of performance.
With economic growth above 3% in the United States and inflation near the Fed’s 2% target, it’s difficult to make the case for Gold other than the old “Goldbug” paranoia about government collapse and such. We don’t share those concerns as acutely as our traditional Goldbug friends. There’s actually an argument to be made that Goldbugs of the 1970s and 1980s were partially motivated by a kind of trauma since the United States Government has prohibited the ownership of gold several times in their lives.
Now the asset has become thoroughly financialized we can benefit from it if it goes down. We think it is going to go down over the next year or so, and we want to give the position time. Furthermore, the puts are very cheap compared to calls given the recent runup. This is positive for our trade:
Buy the January 16, 2026 $245 puts on $GLD which are trading at about $11.00. These are illiquid so you may need to fiddle around to fill at a price around this (since it is average between ask/bid). I would feel comfortable buying this position up 10% higher if you can’t fill your order.
Hold this contract for a while. Its possible Gold gets a spike if/when the Israelis attack or even around the US elections. But overall, I think Gold will be losing relative appeal as this bull market marches onto later stages which are more marked by ebullience and FOMO.
Sir John Templeton was a famed contrarian investor. His quote in the beginning of this article illustrates the contours of a typical bull market. We are in the phase of a bull market that is growing on skepticism. I think Gold’s rise is partially symptomatic of this earlier phase of a bull market that is still marked by a lot of pessimism. I also think economic pessimism should peak around the US election. As the market transitions to maturing on optimism, many investors will sell their Gold for more lucrative assets that folks will begin to chase.
US economic growth is projected to be above 3%. That is a huge number, and this type of economic growth and stability we are experiencing seems durable for the time being. That is incongruent with Gold being at all time highs. I also think there are major generational currents against Gold, and that many millennials who inherit portfolios containing Gold will want to sell it for other assets. Overall, Gold has had an incredible generational run, but I think a burgeoning bull market will cause the metal to lose its relative luster to riskier assets. Our trade has over a year to play out, so don’t let initial weakness scare you.