In a recent interview, Ms. Carley Garner - a veteran commodity trading expert, co-founder of DeCarley Trading - said that the role of gold as a currency risk hedging tool may face the biggest challenge in many years if US Federal Reserve (Fed) Governor Kevin Warsh succeeds in reversing the long-standing trend called "USD devaluation trade".
According to Ms. Garner, the market is underestimating the importance of Mr. Warsh's view of restoring price stability through narrowing excess liquidity, instead of just relying on interest rate policy. If successful, she believes that a stronger USD will eliminate one of the main drivers driving the historic rally of gold.
“When Mr. Warsh was appointed, he made it very clear that he wanted to deal with USD devaluation transactions. He wanted to withdraw money from the system, reduce the money supply, thereby boosting the USD... I think he is trying to control inflation with a stronger USD. This is my point of view, and that is not good for gold, silver, copper or most other commodities” - Ms. Garner said.
Ms. Garner said investors have been buying gold for years as a hedge against the risk of currency depreciation. However, a credible policy to strengthen the USD could fundamentally change this story.
The key to all problems lies in the USD," she said, adding that commodity groups in general will face difficulties if policymakers succeed in reversing investment trends based on abundant liquidity that have dominated the market since the pandemic.
Although still positively assessing gold in the long term, Ms. Garner believes that this precious metal still has room to decrease as speculative cash flow continues to withdraw from the market.
I think we are entering a large-scale liquidation phase," she said.
According to Ms. Garner, speculative capital once boosted the price increases of meme stocks (stocks that increased sharply mainly due to interest, spread and crowd psychology on social networks, rather than just based on fundamental factors such as profits, revenue or business performance of enterprises), cryptocurrencies, precious metals and recently the group of technology stocks are gradually leaving risky assets. She predicts that US Treasury bonds and the USD will become the main destinations when investors seek safety and attractive yields.
Ms. Garner predicts that the gold correction will continue before the next major buying opportunity appears. She said she is waiting for gold to establish a solid bottom in the range of 3,700-3,600 USD/ounce. According to her, this will be a reasonable correction after a period of strong market increase. The fall in gold prices to this range is also consistent with the view that the large volume of liquidity pumped into the economy during and after the pandemic still needs to be handled.
Ms. Garner believes that many types of assets are still at a high level due to the impact of unprecedented monetary stimulus packages, instead of fully reflecting fundamental factors.
Despite maintaining a negative view of gold, Ms. Garner said there is still a noteworthy trading strategy if her conditions are met.
She explained that the huge volatility made options trading difficult due to increased contract costs. However, a strategy that was once effective was to buy split-price options at very low prices, far outside the current price range during strong gold waves.
“Usually, such transactions are not effective when the market operates normally. But in the current volatile environment, this strategy is taking effect,” she said.
Ms. Garner said that if gold prices rebound to the 4,350-4,400 USD/ounce range, she will consider betting on the possibility of gold prices falling by using the options strategy. She will buy gold selling rights at 3,600 USD/ounce and at the same time sell selling rights at 3,800 USD/ounce to reduce trading costs.
The $200 difference will be very cheap because it is too far from the current price range. We don't necessarily expect gold to reach those levels, but just a sharp drop could increase the value of these options," she analyzed.
Finally, Ms. Garner said that although she does not choose to short sell gold in the current environment, she still prioritizes trading in a downward direction, especially when the summer period - a time when the market is usually quiet - is beginning.
