Gold bullion – Overdue for a Pullback? (Richard Russell)
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November 26th, 2009 by Prieur du Plessis, Investment Postcards from Cape Town
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Gold closed up $1.10 yesterday to scale a fresh high of $1,165.80. Amazingly, this was the 14th higher close of the last 15 sessions..
It doesn’t take much analysis to conclude that gold is overbought, at least in the short term, but here is Richard Russel’s (Dow Theory Letters) answer to the question “Should I buy more gold here?”.
“To those of us who bought gold a year or five ago, gold looks expensive now. But is it really expensive? Does the US have too much debt? Can the dollar avoid a collapse? Those are questions I cannot answer. As I write tonight [Friday], gold futures are up over $17. By any standard, gold appears to be overbought. But wait - I’m wondering whether gold is on the edge of its third, speculative phase and whether it is starting to go parabolic. If gold is going parabolic, then there’s no such thing as ‘overbought’. Gold will continue to rise until it’s exhausted. And ultimately it will rise higher than almost anyone is expecting.
“I’ve written before that my experience in big primary bull markets tells me the item in question will advance further than anyone thinks reasonable or even possible. If gold is entering its third phase, I have no idea where it’s heading and neither does anyone else.
“Furthermore, if gold is close to going parabolic, all you can do is close your eyes and place your buy order. Waiting for a big gold correction is going to be a frustrating wait. You just have to pull the trigger and buy it. When the primary trend is up, the bull market will usually bail you out of most of your mistakes (and, of course, you will make mistakes).”
Mr Russell may very well be right, but I would still be reluctant to buy now, especially when considering gold’s “high pole” on the point and figure chart below, indicating the metal is overdue for a pullback.
Source: StockCharts.com
I have always been a proponent of buying a notoriously volatile asset like gold on downward reactions, which are bound to happen from time to time - even in a well-defined bull market. That’s the way I will play it.
Dr. Prieur du Plessis is an investment professional with 26 years' experience in investment research and portfolio management. More than 1,200 of his articles on investment-related topics have been published in various regular newspaper, journal and Internet columns, including his blog, Investment Postcards from Cape Town. He has also published a book, Financial Basics: Investment. Prieur is Chairman and principal shareholder of South African-based Plexus Asset Management, which he founded in 1995. The group conducts investment management, investment consulting, private equity and real estate activities in South Africa and a number of foreign countries. He also serves as Honorary Consul of Slovenia for South Africa, actively developing economic, cultural and scientific relations between Slovenia and South Africa. Prieur is 54 years old and live with his wife, television producer and presenter Isabel Verwey, and two children in Cape Town, South Africa. His leisure activities include long-distance running, traveling, reading, motor-cycling and scripophily. Read more from the author/contributor here.
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