(Kitco News) - Gold continues to hold support around $4,000 an ounce, but according to one market strategist, it's only a matter of time before the precious metal heads lower as it faces challenging headwinds from a stronger U.S. dollar.
In an interview with Kitco News, Carley Garner, veteran commodities trader and Co-Founder of DeCarley Trading, said that gold's role as an important monetary hedge could face its biggest challenge in years if Federal Reserve Governor Kevin Warsh succeeds in reversing the years-long trend that has been described as the U.S. dollar "debasement trade."
Garner said that markets are underestimating the significance of Warsh's emphasis on restoring price stability by shrinking excess liquidity rather than relying solely on interest rate policy. If successful, she said, a stronger U.S. dollar would remove one of the primary drivers behind gold's historic bull market.
"When Warsh was appointed, he made it pretty clear that he's going after the debasement trade," Garner said. "He wants to pull money out of the system, reduce the money supply, which boosts the dollar... I think he's trying to control inflation with a stronger dollar. That's my take, and that's not good for gold or silver or copper or pretty much any commodity."
Garner said investors have spent years buying gold as protection against currency debasement, but a credible policy aimed at strengthening the dollar would fundamentally alter that narrative.
"The key to all of this is the U.S. dollar," she said, adding that commodities broadly would struggle if policymakers successfully reverse the liquidity-driven inflation trade that has dominated markets since the pandemic.
Although Garner remains constructive on gold over the long term, she believes the precious metal has further downside ahead as speculative money continues to unwind.
"I think we're going into a period of mass liquidation," she said. "It feels to me like a slow-motion train wreck."
According to Garner, speculative capital that previously fueled rallies in meme stocks, cryptocurrencies, precious metals, and, more recently, technology stocks is gradually leaving risk assets. She expects Treasury securities and the U.S. dollar to become the primary beneficiaries as investors seek both safety and attractive yields.
"Ultimately, that's the only place that's going to pay you 4% or 5%," she said of U.S. Treasuries. "If things are really going to hit the fan, that's really the place to be. U.S. dollar and Treasuries."
That outlook leaves Garner expecting gold's correction to continue before the next major buying opportunity emerges.
She said she is looking for bullion to establish a durable bottom between $3,700 and $3,600 an ounce, levels she believes would represent a healthier reset after the market's powerful advance. A decline into that zone would fit her broader expectation that excess liquidity injected during and after the pandemic still needs to be worked out of the financial system.
Garner argues that many asset classes remain elevated because of unprecedented monetary stimulus rather than underlying fundamentals.
"I actually legitimately think that's all we've been doing for the last four years," she said. "We have to work through all of that fake money before we find out where we actually are."
Although Garner is maintaining her bearish outlook for gold, she said she does have one interesting trade idea if her conditions are met.
She explained that the extreme volatility has made options trading fairly difficult because contracts have become very expensive. She said one strategy that has worked well has been buying "silly," inexpensive, far-out-of-the-money put spreads during strong rallies.
“Normally, these types of trades don’t work when markets are functioning normally, with all this wildness, this has actually been working,” she said.
Garner said that if gold can get back to between $4,350 and $4,400 an ounce, she would look to buy a put option with a $3,600 strike and sell a $3,800 put.
“A $200 spread is going to be super cheap because it will be so far out of the money. We don't necessarily expect gold to get to those strikes, but just a big down day will pump up those spreads,” she said.
Ultimately, while she wouldn't outright short gold in the current environment, Garner said that she prefers to play the precious metal on the downside, especially as the summer doldrums start to kick in.
