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Gold ETF may be headed back to nine-year highs, trader says. Here's one way to play it

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Trader flags opportunity in gold ETF after stocks' worst day since March

They don't call it a universal hedge for nothing.

The catalysts are aligning for gold as the stock market digests its massive run off the lows, and investors might want to take advantage, Todd Gordon, managing director of Ascent Wealth Partners, told CNBC's "Trading Nation" on Thursday.

Stocks rebounded early on Friday after having their worst trading session since March on Thursday. Gold prices paced for their best weekly gain since April as worries around the welfare of the global economy lingered.

"The gold market could be a nice way to sort of hedge a potentially overbought stock market," Gordon said, adding that a weakening U.S. dollar and low-interest-rate environment are "generally supportive of gold."

"If we look at the ETF GLD that tracks the underlying gold futures, it's been an amazing run," he said, citing a chart of the SPDR Gold Shares Trust (GLD). "It looks like we're heading back up towards the highs, potentially."

The GLD hit its all-time high of $185.85 in September 2011. It climbed less than 1% to above $163 in early Friday trading.

"What you might look to do if you want to try to play for a move to get back up towards these highs just around $187-190 would be to buy a nearby call and then sell one up around your objective to finance the purchase of that call," Gordon said. "That's called a call debit spread."

Calling up a shorter-term chart, Gordon pointed out that the GLD has recently consolidated just below the $165 level.

"You can see that gold is really knocking on the door to try to break out through 165, and any additional volatility in the market and pressure in the U.S. dollar could likely be the push that gold needs to break through that ceiling," he said.

The trade Gordon recommended expires on Nov. 20, which he noted is after the upcoming presidential election. He suggested buying a $170 call — slightly "out of the money," or above the GLD's current price — and selling a $190 call.

That trade represents a bet that the GLD could rise as much as 16.5% to above $190 by the time of its expiration. The purchased $170 call limits risk by setting a closer target. The value of the $170 call will rise in the near term if the GLD keeps climbing.

In a scenario where the trade fails, Gordon's rule is "if half of the premium that you just paid for [the trade] is eroded, generally, the trade is not working. Let's exit. Let's maintain a good risk profile here, ... get out, manage your risk and exit," he said. "Otherwise, we're looking for a breakout through 165."

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