Should we worry about a gold bubble?

Gold put on a fine performance last year but it declined by over 6% during January and reached a low of $1 308,25 during the first week of February. The correction led to talk of a gold bubble but the yellow metal has changed course again.

“The question is, will the recent rise that was sparked by turmoil in North Africa and the Middle East continue, or is gold entering the final stages of a decade-long bull market?” asks Prieur du Plessis, chairperson of Plexus Asset Management.

Du Plessis says analysts expect that gold will correct down to 1 200 or even 1 000 but he believes the gold bull market has further to go. Quoting the McClellan Market Report, he says a cycle low for gold appears roughly every 12 and a half months.

Cycle lows have run true to form: January 6 2006, January 8 2007, January 7 2008, January 5 2009, January 4 2010 and February 8 2011. This indicates that the low may have arrived—but gold is still holding its level. This doesn’t mean it doesn’t have some further short-term downside potential, though.

What does this mean for the investor? If you’re heavily invested in gold, should you sell? Du Plessis says it’s not necessarily time to turn your back on your gold or gold items and he quotes Richard Russell, author of the Dow Theory Letters, as saying that the bull market in precious metals isn’t over.

“During the past two years the 150-day moving average (MA) of gold supported every decline, just as it has in this most recent correction. I look for changes in market action. The first real indication of change in gold would be the metal breaking below its 150-day MA,” Russell wrote last month.

‘An Asian put’
Although investors expected more from gold when the Egyptian political crisis took hold, as investors tend to move their money into “safer” assets, the gold price didn’t rocket. Does this suggest gold has lost some of its “oomph”? Not necessarily.

Du Plessis believes that the bull market is intact, for now, especially given the global inflation outlook. He refers to a recent King World News interview with James Turk of GoldMoney, a precious metals expert, who pointed out that the Commodities Research Bureau (CRB) Index is at record highs.

“There is simply too much money being printed around the world and this monetary debasement is behind the ongoing bull market in gold and silver,” Turk said.

“China and several other Asian countries keep adding gold to their reserves. These purchases should provide a floor to price declines—an ‘Asian put’ so to speak,” Du Plessis added.

J P Morgan Chase also did something interesting last month—it declared its intention to accept physical gold as collateral with its counterparties as more clients use bullion as a hedge against inflation. So if you’re considering gold as an inflation hedge in your portfolio, well, you may be on to something.

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