The man who called the bottom for gold now warns it could be time to fade one of the hottest commodity trades of the year.
In December, when gold was trading around $1,130 an ounce, Carter Worth, of Cornerstone Macro, predicted the yellow metal could soon move higher. Since his contrarian call, gold has rallied 8 percent, driving the gold-tracking ETF GLD up by the same amount.
But as the dollar has gained momentum, the economy has shown signs of strength and the odds of a March rate hike have increased in recent weeks, gold has dropped almost 2 percent. That coupled with a deteriorating technical backdrop leads Worth to believe a perfect storm could be brewing for the commodity.
On a chart of GLD, Worth looks at both the uptrend and downtrend lines for the ETF. GLD's recent fall corresponds with a downtrend line that began in May of last year, suggesting that the metal will fail to rise above the line. Moreover, gold has also fallen below an uptrend line that appeared when the metal began its rally, suggesting that gold's run may be done.
"[My bet is] that we're going to move lower here," Worth said Friday on CNBC's "Options Action." "This is just the beginning of a period of further weightness."
Given the fundamental and technical factors behind a drop in gold prices, Mike Khouw of Optimize Advisors on "Options Action" suggested buying the GLD May 116-strike puts and selling the GLD May 107-strike puts for a total of $1.35 per share. Should GLD close below $113.75 on May 19, more than 2 percent from current levels, then Khouw would profit from his trade.
