Gold bullion – overdue for a pullback?

By Prieur du Plessis, on November 25th, 2009 posted in: Gold, Investment 3 people had their say - chime in!

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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.

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