In just over 4 months prices of gold have lost their luster, trading lower by $250/ounce H/L. It is my opinion that the easy money has been made on any bearish trades, and this is just a correction on a longer-term bull trend. For a move to be sustainable, it is healthy to see washouts… and that is exactly how I define the recent leg lower. This move should create a compelling argument why owners of physical gold or substantial holdings in gold ETFs and stocks should not fall asleep at the wheel, and should incorporate a hedging strategy if they anticipate any sizable downside. This leg represents a near 15% correction. Let's discuss how taking 5-10% of your overall position in metals can be used in futures and options to hedge downside… view it as insurance. In a perfect world, you make money on the hedge and then buy more metal at lower prices with the proceeds… of course, we do not live in a perfect world, but this would be the idea.
The same support levels that held last summer just under last week's lows have acted as support thus far. I have advised clients to start scaling into bullish trade in June, August and December contracts, depending on their risk tolerances and other allocations in their commodity portfolio.
I am anticipating a quick move back to $1640/1650 in the coming weeks, and then will re-evaluate on the shorter-term positions if that was good enough for a trade, or if we should continue to build a position and stay the course… stay tuned. My favored play for swing trades is to gain long exposure via futures and sell out of the money calls 1:1.
Risk Disclaimer: The opinions contained herein are for general information only and not tailored to any specific investor's needs or investment goals. Any opinions expressed in this article are as of the date indicated. Trading futures, options, and Forex involves substantial risk of loss and is not suitable for all investors. Past performance is not necessarily indicative of future results.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.