The case for buying gold miners as the group sinks to 20-month lows

Gold is having a dreadful year, as the strengthening U.S. dollar has knocked the dollar-denominated asset down to 18-month lows. But rather than run from the weakness, one investor says now might be the time to buy the precious metal as well as gold miners, which have fallen 20 percent this year.

Here's what Larry McDonald, macro expert and editor of the Bear Traps Report, told CNBC's "Trading Nation" on Tuesday.

— Gold miner stocks are seeing a high degree of capitulation, or a sort of "throwing in the towel," with investors fleeing the market after an asset has posted meaningful declines.

— Furthermore, the short interest in the gold miner space has reached its highest level in five years, which creates a promising risk/reward set-up. Most of Wall Street is viewing the Federal Reserve from a hawkish perspective, and that's placed pressure on the miners. Much of this is due to the U.S. dollar's gains.

— The dollar has become, as it was in 2014 and 2015, the global wrecking ball. The dollar is gaining against the euro as Brexit tension has weighed on the pound in the U.K., and the euro is under stress due to the financial disarray in Turkey and political unrest in Italy.

— All of these factors are placing tremendous upward pressure on the U.S. dollar, and that's contributing to the pain across the commodities space, in particular with high capitulation in the gold miners. At the end of the day, the Federal Reserve and the global economy may now get knocked onto a softer tightening path, and that's going to create an attractive risk/reward into year-end.

Bottom line: Gold prices and the gold miners specifically have fallen so far, so fast, that risk/reward set-up is attractive.

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Trading Nation is a multimedia financial news program that shows investors and traders how to use the news of the day to their advantage. This is where experts from across the financial world – including macro strategists, technical analysts, stock-pickers, and traders who specialize in options, currencies, and fixed income – come together to find the best ways to capitalize on recent developments in the market. Trading Nation: Where headlines become opportunities.

Michael Santoli

Michael Santoli joined CNBC in October 2015 as a Senior Markets Commentator, based at the network's Global Headquarters in Englewood Cliffs, N.J.  Santoli brings his extensive markets expertise to CNBC's Business Day programming, with a regular appearance on CNBC's Closing Bell (M-F, 3PM-5PM ET). In addition, he contributes to CNBC and CNBC PRO, writing regular articles and creating original digital videos.

Previously, Santoli was a Senior Columnist at Yahoo Finance, where he wrote analysis and commentary on the stock market, corporate news and the economy. He also appeared on Yahoo Finance video programs, where he offered insights on the most important business stories of the day, and was a regular contributor to CNBC and other networks.

Follow Michael Santoli on Twitter @michaelsantoli

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