Should You Hedge Your Gold Position?

12/13/2010 9:41 am EST

Focus: COMMODITIES

Thomas Aspray

, Professional Trader & Analyst

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The gold market is much more crowded now than a year ago when gold peaked at $1227 and declined to the $1050 area before resuming its major uptrend. The monthly on-balance volume (OBV) analysis has been positive since 2002, so the major trend is still up. The weekly OBV, on the other hand, shows a short-term negative divergence as it has formed lower highs. This increases the chances of a sharper decline even though there are no daily sell signals yet.

A break below the support in gold at $1350 and $130 in gold ETF GLD could lead to a drop to the downside targets at $1300 and $126, respectively. Those who are long gold could get some downside protection by selling an at-the-money call—such as the Feb 135, which closed at 4.90—and collecting the premium.

Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.

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