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Gold Melts

Folks, just as markets making their bottoms can be sloppy, so, too, can markets making their tops. I certainly don’t think that we saw a top for gold, but, as I mentioned before, I did feel that the price was getting a little frothy in that 1850-1900 range. As expected, we’re seeing a corrective selloff.

It’s important to remember that when I talk about gold, I’m not talking about GLD. That’s not gold. It’s a piece of paper that replicates where gold is going. I’m talking about futures. They’re the real pricing mechanism, the pure play, the tail that wags the dog—even for the GLD market makers.

As I saw it, the real breakout for gold happened around 1400 (for the sake of ease, I’m going to use round numbers here). That’s the level when we started to see a parabolic move, which took us up around 1900. Those last couple hundred points, especially, were all fear. That’s when I started to think it was time to lighten up—I’m still bullish long-term, but when that emotion enters the market, it’s time to start thinking about downside protection.

I’m not going to try to catch the falling knife here, but if the dollar stays where it is, I wouldn’t be surprised if we saw a pullback of around 150 off those highs—right in the 1750 range. If the dollar gets stronger, it could come off even more. Right now, the dollar-gold relationship may be misleading—in times of corrective patterns, relationships often get thrown out the window.

Don’t get shaken out of your position by this pullback. Bull-market corrections are fast and vicious, but they’re just that: corrections. This is a move that, hopefully, will drive the emotion out of the market and let gold finds its equilibrium again. If you put on downside protection a few days ago when it was rallying, you’re watching those puts explode right now. Remember to take that money off the table and roll that protection down. If you manage your position properly, you can make more on the hedge than you lose on the underlying. That’s how the pros do it.

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