(Kitco News) - Gold’s bullish momentum is starting to wane as prices consolidate below $2,400 an ounce; however, one market strategist says that now is the time to build a long position in gold before prices move higher.
In a recent interview with Kitco News, Carley Garner, co-founder of the brokerage firm DeCarley Trading, said that although gold has dropped from its recent record highs above $2,480 an ounce, the market is still in a strong uptrend and investors should see the drop as a buying opportunity.
“From a seasonal standpoint, normally gold sees a big flushout during the summer. It's usually late July or early August. But, once that selling runs its course, we usually get a nice rally,” she said. “If you look at gold, I think in the big picture, we're consolidating, and I don't think we're quite done going up.”
Although the market has room to move lower, Garner said that she is targeting $2,650 by the end of the year. Despite some profit-taking, she noted that the precious metal has held an important trend line.
However, looking at the longer trend, Garner said that she is watching critical support at $2,300 an ounce.
“Somewhere between here and $2,300 is a place to start digging your heels in and trying to get in a position for when we make another run to the upside,” she said.
Currently, Garner is looking to capitalize on gold’s upside potential through the options market. Although gains may not be as high as buying outright futures, she noted that risks are significantly more manageable.
Last week, Garner issued an options spread trade recommendation to her subscribers. She is looking to buy December Gold call options with a strike price of $2,500 and sell a December Gold call option with a strike price of $2,600.
She added that she paid for the trade by selling December put options with a strike price of $2,250. She pointed out that the put option allows the trade to be wrong all the way to the 200-day moving average (at expiration) without causing a loss.
Garner noted that the risk is that gold prices drop below $2,250 an ounce.
“Basically, we are getting long with lots of room for error just in case it gets messy in the next week or two,” she said. “If the price does get down to $2,250, I think it's fair to say that the bullish rally would be over.”
Garner said that it's difficult not to be bullish on gold as fundamentals continue to support higher prices. She noted that gold has managed to hit all-time highs even as higher interest rates have supported the U.S. dollar.
With markets expecting the Federal Reserve to start cutting interest rates in September, Garner said that she is looking for U.S. dollar headwinds to shift into tailwinds. She added that the U.S. dollar index holding above 104 points is unsustainable.
“When the U.S. dollar index breaks down, [99 points] will be in play, and just that alone will push gold higher,” she said.
Garner said that she is looking for a rate cut as she expects U.S. growth to start to slow down in the second half of the year. Her comments came after U.S. GDP data showed the economy growing 2.8% in the second quarter, significantly beating expectations.
“Obviously, the Federal Reserve has never been in a big hurry to lower rates, but that can change really, really quickly,” she said. “I'm seeing some red flags, one of them being copper prices. If you look at what is going on in copper, it's basically sitting around $4 per pound. I think we actually see the high threes in copper. And to me, when I see copper behaving like that, it's a telltale sign that there's something wrong with the economy behind the scenes.”
