Gold was hit hard today with a drawdown of around 30 points. Notice that the carnage was stopped at the uptrend line providing support.
The commercial banks with the help of the Fed, BIS and US Treasury are gearing up for another smash of the precious metals paper futures market. That’s why the COT report shows a record number of shorts in gold and silver by the commercial banks.
In the past, this always indicated that a smash in precious metals was guaranteed to happen. The question today is whether the extreme lack of supply in precious metals coupled with the extreme demand will overpower the commercial banks and cause a huge short squeeze in the metals?
Many analysts believe we are at that pivotal point where we either get a default from the Comex or the next price suppression attempt will fail do to the extreme supply/demand metrics.
So how do we protect our positions for such an uncertain situation? Well, we could just place stops, but if we have a smash of the price, it’s probably going to be very temporary and then rocket back higher. Therefore, you might get stopped out at a lower price than you want and then have to scramble to get back in when things change direction.
The best alternative is to either buy Calls on an inverse gold fund like (DUST) or to buy Puts on(GLD) as a hedge against your long positions. This way you can hold your long positions through the drawdown with the knowledge that it’s going to be temporary and benefit from the short positions as it goes down.
Now, if it does draw down, you should place a trailing stop on your short positions so when it finally bounces back up, you will lock in the profits on your short positions and then after the bounce, your long positions will take back control.