The gold market may still have potential for short-term gains; however, market strategist Carley Garner warns that the precious metal is running out of buyers, raising concerns about increased downside risks.
Garner, co-founder of DeCarley Trading, has maintained a bullish outlook on gold but acknowledges that with prices surpassing $2,600 an ounce, it may be time to reconsider this stance. “I see gold coming up against some significant resistance levels, and it’s difficult to justify being bullish at these prices,” she stated in a recent interview with Kitco News.
Currently, December gold futures are trading at approximately $2,667.90 an ounce, holding steady on the day. The precious metal has seen an unprecedented rally this year, achieving record highs as the market anticipates the Federal Reserve’s new easing cycle.
Garner points out that while factors such as lower interest rates, economic uncertainty, and geopolitical instability traditionally support gold prices, she questions how much of these elements have already been factored into the market. “No matter how bullish the fundamentals are, if everyone is already long, the market will eventually run out of buyers,” she cautioned. “I think the market needs a reset as it looks for a new narrative.”
In addition to the overbought condition of gold, Garner highlights the risk posed by unexpected economic weakness, which could lead to a decline in equity markets. She notes that the S&P 500 Index is trading near record highs and that a minor setback could spook investors, potentially creating a liquidity trap that would negatively affect gold prices.
“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 explained. “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 emphasizes that shorting gold at current levels represents a contrarian play. To mitigate risks, she favors using an options spread for her downside strategy. She originally made this trade recommendation on September 17, when prices were just below $2,600 an ounce.
In her bear put spread, Garner sold the February $2,900 call option and a February $2,400 put option, using the proceeds to buy a February $2,500 put option. This strategy carries unlimited risks if gold prices exceed $2,900 an ounce, but if held to expiration, the maximum profit potential could be around $10,000. Garner intends to actively manage this trade, targeting profits between $2,000 and $4,000.
“It is imperative to give the market plenty of room to breathe,” Garner advised. For those seeking limited risk, she suggests purchasing the February $2,300 puts for about $800, as these could provide a reasonable position if gold corrects. “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 anticipates that if gold begins to correct, prices could easily retreat to $2,300 an ounce. She also notes that it’s not uncommon for gold to revisit its original breakout level from March, when prices first surpassed $2,150 an ounce.
While Garner expects lower prices through October, she warns of heightened uncertainty and volatility in November, particularly surrounding the U.S. presidential election.
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