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Is gold an attractive long-term investment?

Gold versus Bitcoin


Bitcoin is not backed or linked to gold, other precious metals, or fiat. Bitcoin is a cryptocurrency that derives its value from other factors, including supply/demand, technological value, usability, and decentralized acceptance, among others.

Is gold a better long-term investment than Bitcoin?


The soaring price of Bitcoin a few years ago attracted widespread interest. However, the dramatic collapse in cryptocurrencies over the past year has drawn concerns. Although Bitcoin has become an alternate investment for some investors, Bitcoin is too volatile and erratic to be a store of value.


Is gold a legitimate asset class?


Although overshadowed by Bitcoin, gold attracts investors, especially those looking to protect their assets from inflation and geopolitical and economic uncertainties. However, some argue gold is not a legitimate asset class as it no longer holds the monetary qualities as in the past. In today's economy, paper currency is the preferred money of choice. So, can gold still play a role in today's modern economy? Goldbugs assert gold remains an important asset class with intrinsic qualities that make it unique and suitable for many investors.


Gold as a safe-haven asset class


Gold is sought after, not just for its hedging purposes and to make jewelry, but also used in many electronic and medical devices. There are many benefits to incorporating gold as part of an overall investment strategy for the long term. Gold tends to rally when there is turmoil in the global equity markets or heightened political tensions among countries. Gold is a safe-haven asset to own in your portfolio during uncertain times.


Advantages and disadvantages of gold


One of the advantages of gold is that it is stable and liquid. Gold can be purchased and sold at the same price across the world. Some investors own the precious metal as part of a diversified long-term investment portfolio. Gold is predominately a hedge against inflation and a decline in the U.S. dollar. Because of its store of value, gold can preserve wealth for many generations, unlike many of the weaker paper-denominated currencies.


There are advantages and disadvantages to every investment. Buying gold, however, comes with unique costs and risks. Studies have shown that gold can disappoint investors over the near-to-medium time frame. For instance, a comparison between Gold and S&P 500 Index over the past five years showed gold underperformed its counterpart. SPX has returned over 100% in total returns and gold at less than 50% over the same period.


What drives the price of gold?


Like other commodities, supply and demand are the single most important drivers of the price of Gold. However, gold is unique because it is also a stored value. Nonetheless, supplies of gold are primarily driven by mining production. Central banks and government vaults remain a critical source of demand for the metal. Also, the investment demand from ETFs and other mutual funds can impact the underlying price of gold. Gold, like other commodities, tends to move in the opposite direction to the trend of the U.S. dollar because the metal is dollar-denominated, making it a good hedge against inflation.


Gold mining stocks, ETFs, Mutual Funds, and Futures


If you do not wish to hold the physical gold, there is an alternative way to participate in gold. You can buy shares in gold mining companies (i.e., Newmont Goldcorp, Barrick Gold, Kinross Gold, etc.), Gold ETFs (GLD, IAU, GDX, GDXJ, etc.), and gold mutual funds (Fidelity Select Gold - FSAGX, Gabelli Gold Fund - GLDCX, Invesco Oppenheimer Gold, and Special Minerals Fund - OGMYX, etc.). For those that wish to purchase physical gold, investing in gold coins, bullion, or purchasing gold jewelry may be the right choice. For aggressive gold traders, the futures market is the leveraged way to buy gold.


Gold Technical Outlook


Gold has experienced long-term bull and bear trends, including the 1970s to early-1980s (structural bull), 1980 to 2000 (structural bear), 2001 to 2011 (structural bull), and late 2011 to present (structural trading range).


The Jun 2019 breakout above 1,377.50/1,357.90 (intra-day/intra-month) has led to a sharp rally that briefly set new all-time highs (2,089.20 - 8/7/20 and 1,985.90 - intra-month), eclipsing the prior Sep 2011 all-time high (1,923.70 - intra-day and 1,826.90 (intra-month).


However, a decade-long cup and handle breakout above 1,827/1,986 still suggests 799.40/766.40 points or a longer-term gold target at 2,593-2,723.


On a near-to-intermediate-term basis, a moderately overbought condition developed at 2,078.80 (3/8/22 high) or near 2,089.20 (Aug 2020 all-time high).


Violation of pivotal support at 1,672-1,678 (Jun 2020, 2021, and Jul 2022 lows) led to a retest of 1,627.5 (50% retracement from 2018-2020 rally), and below this 1,518.5-1,566 (Jan 2020 breakout and the 61.8% retracement), and 1,446-1,451 (Nov 2019 and Mar 2020 lows).


A positive outside day on 10/21/22 ignited a recovery to key resistance at 1,823-1,837 (Sept 2021 and Aug/Dec 2022 highs) and above this 1,879.5-1,882.5 (Nov 2021/Jun 2022 highs), 1,919 (Jun 2021 high), 1,962.5-1,966 (Nov 2020 and Jan 2021 highs), 2,003 (Apr 2022 high), and 2,079-2,089 (Aug 2020 and Mar 2021 highs).


Initial support rises to 1,814.5-1,824.5 (Mid-Dec 2022 breakout and 30-mo ma) and below this 1,778-1,783 (10-mo ma, 200-day ma, 5/16/22 and Dec 2022 lows), 1,750-1,758.5 (50-day ma, Jun 2021, and Dec 2021 lows), 1,719-1,721 (11/23/22 and Sept 2021 lows), 1,673-1,678.5 (Mar and Aug 2021 and Jul 2022 lows), and 1,618-1,622 (Sept, Oct, and Nov 2022 reaction lows).


Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com

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