(Kitco News) - Gold investors battered by the latest selloff could see some relief through October, as one market strategist sees an opportunity for a tactical bullish trade even though she remains bearish on the precious metal’s longer-term outlook.
In an interview with Kitco News, Carley Garner, co-founder of brokerage firm DeCarley Trading, said lower prices, technical support and favorable seasonal trends have created an attractive setup for a short-term rebound in gold.
“ Do I think gold's going to $5,000 or $5,500? No, I don't,” she said. “But I think the next three or four hundred points is probably on the upside.”
Garner noted that gold has historically benefited from positive seasonal factors at this time of year. According to the seasonal data she follows, buying gold around Sept. 29 and holding through Oct. 25 has produced gains in 12 of the past 15 years. At the same time, December gold futures have managed to hold an important daily trendline during its latest sharp selloff.
However, Garner stressed that she is looking for a relief rally rather than the start of a renewed long-term uptrend.
With the cost of a standard 100-ounce gold futures contract creating significant risk for smaller traders, Garner said DeCarley Trading has suggested that traders looking for direct exposure consider micro gold futures when gold is around $4,200, or even one-ounce gold futures to limit overall exposure.
In her latest recommendation, Garner said the firm’s primary tactical trade is an options strategy designed to take advantage of a potential rebound. She added that to reduce risks, traders could potentially buy options in mini gold contracts or even the one-ounce contract
Garner explained that the trade involves selling a December $3,900 put and using the premium to buy a 4,300/4,450 call spread — buying the $4,300 call and selling the $4,450 call.
“So we’re using the market’s money to buy the call spread,” she said.
The strategy, however, carries substantial downside risk if gold falls sharply below $3,900. Garner described the risk below that level as unlimited.
Despite the risks, Garner said that she expects support around $4,000 to hold. She said the combination of gold holding its technical trendline and the recent volatility surrounding the October contract’s first-notice period suggests the market may have established at least a temporary bottom.
On the upside, Garner said her best-case scenario sees gold rally toward its 200-day moving average around $4,650, although her more realistic tactical target is around $4,500.
A stabilization in the Treasury market could provide the catalyst for gold’s next move. Garner said she believes Treasury prices may be approaching a “blow-off bottom” after years of weakness. Although she acknowledged that bond-market volatility could become even more extreme, she said any signs that Treasuries are stabilizing could give gold room to rebound.
“As soon as there’s a sign of any kind of stabilization in Treasuries, I think gold gets a chance to relief rally,” she said. “The risk is that in these blowoff moves there is no limit to the chaos.”
Despite the near-term bullish setup, Garner emphasized that she has not abandoned her broader bearish outlook for gold.
In fact, she said a rally toward $4,500 or $4,600 would give her a much more attractive level from which to establish bearish positions.
“I’m not bullish by any means,” she said. “I would much rather be a bear from somewhere around $4,500 to $4,600 if we get there.”
Garner’s longer-term concern is the U.S. dollar. She noted that the dollar earlier this year tested a roughly 20-year trendline that has historically generated significant rebounds. She expects the greenback to eventually break out of its current grinding recovery, creating renewed pressure on precious metals.
“I think that will eventually be the nail in the coffin for the metals, gold and silver,” she said.
Garner sees similar medium-term downside risks in copper, with her outlook again tied in part to expectations for a stronger U.S. dollar.
Although copper has become one of the favored commodities in the artificial intelligence and electrification trades, Garner said the metal is testing a major long-term technical resistance level that has repeatedly preceded significant corrections.
She explained that copper is testing a roughly 20-year trendline for the fifth time, with previous encounters resulting in sharp pullbacks. While she is not forecasting a repeat of some of the extreme historical declines, she said a correction of between 30% and 50% is possible.
Her bearish copper outlook also fits with her broader expectation that the U.S. dollar is preparing for a more significant move higher. Garner said markets have largely ignored the dollar because previous rallies have repeatedly stalled, but she expects that dynamic to change.
“I think the dollar is going to start breaking things,” she said, adding that financial markets have yet to fully price in the potential impact of a stronger greenback.
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