(Kitco News) - The gold market may have room to move higher in the near term; however, the precious metal is running out of buyers, which means risks to the downside are growing, according to one market strategist.
Carley Garner, co-founder of the brokerage firm DeCarley Trading, has been bullish on gold for a while; however, she added that with prices now above $2,600 an ounce, it's time to look at the other side of the trade.
“I see gold coming up against some significant resistance levels, and it's difficult to justify being bullish at these prices,” she said in an interview with Kitco News.
These comments come as gold prices consolidate above $2,650 an ounce. December gold futures last traded at $2,667.90 an ounce, roughly unchanged on the day.
Gold prices have experienced an unprecedented rally this year, hitting consecutive record highs in recent weeks as markets prepared for the Federal Reserve’s new easing cycle.
Garner noted that while lower interest rates, economic uncertainty, and geopolitical turmoil provide solid support for the precious metal, she questions how much of these key factors have already been priced into the current market action.
“No matter how bullish the fundamentals are, if everyone is already long, the market will eventually run out of buyers,” she said. “I think the market needs a reset as it looks for a new narrative.”
In addition to gold’s overbought momentum, Garner said another risk is any unexpected economic weakness that could drive equity markets lower. She pointed out that the S&P 500 Index is trading in precarious record territory, and it wouldn’t take much to spook markets, creating a liquidity trap that could drag gold lower.
“Fund managers are sitting on one of the largest bullish positions they’ve ever had in history. Big institutional players are holding massive long positions,” she said. “At the same time, investors are more leveraged than they realize. They haven’t grasped how much risk they have taken on because they haven’t had to endure a correction. This is what will create liquidity problems in the marketplace that could hurt gold.”
Garner noted that shorting gold at current levels is an extremely contrarian play, and to limit risks, she prefers to play the downside with an options spread. She mentioned that she made her trade recommendation on Sept. 17 when prices were trading just below $2,600 an ounce.
In the bear put spread, Garner sold the February $2,900 call option and a February $2,400 put option and used the credits to buy a February $2,500 put option.
She added that this trade carries unlimited risks if prices push above $2,900 an ounce. If the trade is held to expiration, the maximum profit would be around $10,000.
However, she also noted that she plans to actively trade this option and is targeting profits of around $2,000 to $4,000.
“It is imperative to give the market plenty of room to breathe,” Garner said in her original trade recommendation. “If you prefer limited risk, the February $2,300 puts can be purchased for about $800. If gold corrects, that might not be a bad position. A normal back-and-fill pullback could see prices drop to $2,300 or $2,150. Another way to play would be to sell micro or mini futures in a 'nibble' fashion.”
Garner noted that if gold does start to correct, prices could easily fall back to $2,300 an ounce. She added that it is also not unheard of for gold to retest its original breakout level, which dates back to March when prices broke above $2,150 an ounce.
While Garner is expecting lower prices through October, she also anticipates a lot of uncertainty and volatility in November around the U.S. presidential election.
She advised that traders, in general, should start reducing their risks and exposure ahead of the election
