Gold hit a record of $1852 at Friday’s close. Its recent run up since July 11 has been impressive. However it is now in overbought territory and has been for about a month. Gold doesn’t typically stay in overbought territory according to the stochastic oscillator for much longer than this. It is just a matter of time before a correction takes place. When the correction does take place, expect gold to fall 5% - 10%.
If you are bullish on Gold for the long-term, I would suggest waiting for the next pullback before starting a new position. If you already have a position in a tradable ETF such as GLD, IAU, UGL, GDX, or an individual gold stock you should consider taking some profits. Perhaps sell 25% - 50% of your holdings. If you just want some downside protection and you already own one of the ETFs consider selling some out of the money call options against your long position. Look to sell call options that are 10% - 15% out of the money. As an alternative, you could buy a put option, but they are looking a little expensive right now – the odds are in your favor to sell out of the money call options.My opinion is that we’ll have a 5% - 10% correction within the next few weeks. After that, I think that gold will continue to move towards $2000 an ounce.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.