Long-term bull market in gold is not over yet, say investment gurus

Richard Russell, famous market analyst and writer of the Dow Theory Letters, is one of the investment world’s doyens and long-time mentor for Dr Prieur du Plessis, chairman of Plexus Asset Management.

“Russell’s knowledge of the history of the market is truly unmatched.At the age of 86, he is one of the few men able to speak firsthand about the Great Depression and how similar today’s economy feels,” says Du Plessis.

“Like any investor, Russell was not always right with his market forecasts,” says Du Plessis. “While he was dead wrong on equity markets for most of the bull market since March last year, he was one of the few commentators who were spot on with their predictions of the great bull market in gold right from the starting blocks in 2001.”

The gold price in US dollars has risen from $250 at the start of 2001 to $1 341 as at 16 November 2010. “This represents an incredible return of 392% (or 17,4% on an annual basis),” says Du Plessis. “Had you invested in global equities, as represented by the MSCI World Index, over the same period and reinvested dividends, your investment would have shown a paltry return of 25%, or 2,3% annualised.”

He says while Russell was wrong about two strong equity bull markets during this period, from March 2003 to October 2007 and again from March 2009 to date, it is doubtful whether anyone got the timing in and out of the market exactly right. “On the other hand, long-term investors who heeded Russell’s advice to steer clear of the equity market and rather put their bets on gold are smiling all the way.”

Russell believes the bull market in gold still has a considerable way to go. His view is based on his distrust of what he calls the “fiat” dollar. He believes the US Federal Reserve’s strategy of printing dollars to get the economy out of trouble will have disastrous consequences for the dollar and eventually the US economy. He considers gold as one of the few “currencies” that will retain their value.

According to Du Plessis, Russell does not paint a very pretty picture of the US stock market currently. Russell says, “right now, we're seeing the results of a bubble in Fed-created liquidity. When the water continues to pour into a bath-tub, everything – the rubber ducks, the plastic boats, the soap bars – float up with the water line. This goes on until either the water flows over the tub and onto the floor – or mom comes in and pulls the plug.

“I think that's what we're experiencing now in the markets,” says Russell. “Everything tradeable − stocks, bonds, gold, silver, commodities in general – is rising. I call it an all-around mega-bubble. It will continue until someone, purposely or by mistake, pulls the plug.”

According to Russell, only two items seem immune to the surging liquidity: home prices and unemployment. “But there's another possibility. Build a tower out of children's blocks. You can build that tower just so high, and at some point the last block is too much. The tower shudders, it tilts and falls over.”

While Du Plessis is not quite as negative on the prospects for equities over the longer term, he is very aware of the risks that still prevail and the possibility of a short-term pull-back. “However, I agree with Russell that the long-term bull market in gold is not over yet,” says Du Plessis.