Gold Due for a Sharp Correction

10/11/2011 6:30 am EST

Focus: COMMODITIES

Don Kaufman

Co-Founder, TheoTrade

The precious metal could get slammed after a string of new highs, but limit your risk if you’re betting against it, says Don Kaufman, option strategist for thinkorswim and TD Ameritrade, in this exclusive interview with MoneyShow.com.

We’re taking a look at the explosion in gold prices. Don, we continue to make new highs in the yellow metal?

How long is that sustainable? That’s the question that I think everybody is asking right now, and obviously gold is being utilized as the safety play. It’s being utilized as a hedge in some cases. It’s, ‘Hey gold is better than cash,’ some people believe that.

But ultimately you have to look at the explosion to the upside here in gold, and you literally have to ask yourself, not just a trader, hedger, or investor, is that kind of upward move really sustainable?

Just recently I heard an analyst call for gold at $2,500. It’s just amazing to see that one. Could it happen? Absolutely, but with this large run up you got to expect some heavy selling periods here.

It wouldn’t surprise me at all in the coming weeks, the coming months to see gold down one-hundred-plus dollars in a day. It just wouldn’t surprise me at all. The trader in me says there are going to be some very drastic pullbacks in gold.

I hear that central banks are starting to buy gold now at these lofty levels. Why now?

That kind of reminds me of when everybody was talking about real estate. Every time I turn on the TV right now I see commercials for gold, everything’s gold, gold this, gold that. The trader in me wants to be a contrarian and say this isn’t sustainable.

That’s not to say gold is a bubble. Definitely it’s an asset class that is exploding upwards in price right now. It’s too early to call it a bubble, but there’s definitely going to be some selling pressure in there sooner or later. Nothing is sustainable in a large parabolic up-move like we’ve seen in gold.

Would you be willing to short gold?

Absolutely, as a trader I’m willing to short gold. I wouldn’t necessarily go out and short gold futures or short a major ETF out there, but you can utilize certain option strategies with defined risk, like a bearish call spread.

That’s more reasonable than getting short gold in the middle of a high-volatility crisis situation. No matter how bearish you are, that probably is not a decent idea right now.

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