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The U.S. dollar continues to dominate the gold market; however, momentum in the greenback could be running out of steam as the Federal Reserve is unlikely to continue to maintain its aggressive monetary policy stance through year-end, according to one market strategist.
In a recent interview with Kitco News, Carley Garner, co-founder of the brokerage firm DeCarley Trading, said that gold, as it holds critical support levels, is in a good position to hit new all-time highs when the U.S. dollar's momentum starts to fade.
Garner said she expects the U.S. dollar index to hold resistance below 105 points. Ultimately, she sees the U.S. dollar eventually retesting support at 99 points.
"If we break below that support level, we are probably going back towards the mid-nineties and if that's the case, that's a game changer for gold," she said. "Suddenly, we are not looking at $2,000 gold but new all-time highs."
Garner said a breakdown in the U.S. dollar could eventually push gold prices to $2,600 an ounce.
Garner said that one of the reasons why she sees so much potential in gold is because of how resilient it has been in the last few months. While bond yields in the U.S. remain near 15-year highs above 4%, gold has held critical support around its 20-day moving average.
A peak in long-term yields would remove another headwind for gold, she said.
"We are basically sitting on the biggest net short in bonds on record and at some point, that is going to unwind itself," Garner said. "This trade will be unwound and that is going to push interest rates lower. When positioning is this extreme, it's just a matter of time."
One factor that could spark a selloff is if the Federal Reserve shifts to a more neutral monetary policy stance, leaving interest rates unchanged through year-end. According to the CME FedWatch Tool, markets see a more than 90% chance of no rate hike later this month and only a 50/50 chance of a rate hike in November.
Rising bond yields drive outflows from gold ETFs, but long-term support remains
While Garner is bullish on gold, she added that the market could remain volatile in the near term, with prices potentially retesting support around $1,900 an ounce. She said that if bearish momentum picks up, she would not be surprised to see prices fall to $1,980 an ounce.
"I wouldn't give up on it unless maybe we broke below, let's say $1,800," she said.
Although Garner is bullish on gold, she does not have the same enthusiasm for silver. She said that she would rather play a breakout in the precious metals through gold.
"Eventually, silver will outperform gold, but I don't think it's going to happen now," she said. "I think the only thing I can say is that on a shorter time frame, silver is usually a buy around $20."
By
Neils Christensen
For Kitco News
Contact nchristensen@kitco.com
www.kitco.com
