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Writer's picturePeter Lee

Is Gold an Attractive Long-term Investment?

Bitcoin and Gold


The soaring price of Bitcoin earlier in the year and the recent sharp collapse attracted new investors. Although overshadowed by Bitcoin, gold continues to attract investors, especially those looking to protect their assets from inflation and geopolitical and economic uncertainties.


Gold a legitimate asset class?


Some argue gold is not a legitimate asset class as it no longer holds the monetary qualities of 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, it is also used in many electronic and medical devices. There are many benefits of choosing gold as part of an overall investment strategy for the long term. Gold tends to rally sharply when there is turmoil in the global equity markets or heightened political tensions among countries. Gold is simply a good 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 all over the world. 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 the 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 has 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 to 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 believe gold can hedge against inflation, investing in gold coins, bullion, or purchasing gold jewelry may be the right choice. For the aggressive gold traders, the futures market may be the leveraged way to buy gold.


Gold Technical Outlook


Gold futures continue to trend higher trading, toward their highest level since early January 2021, while U.S. Dollar Index has fallen toward its three-month low of 89.17 (1/6/21). The 10-year U.S. Treasury yields (TNX) remain nearly flat over the past two months. Gold investors or traders will need to continue to monitor other assets such as cryptocurrencies and stocks, for the future direction of gold.


On the daily gold chart, the recent surge above 1,850 is technically significant as this action reverses the Aug 2020 downtrend channel (1,850). The ability to clear above the 200-day ma (1,850) is also constructive. The breakout hints of an end to the 9-month gold correction and renders a rally toward intermediate-term resistance at 1,930.5 (61.8% retracement from Aug 2020-Mar 2021 decline). Trading above this pivotal resistance coupled with a move above 1,962.5-1,966 (Nov 2020 and Jan 2021 highs) reaffirms a retest of 2,089.20 (8/7/20 record high).


One concern for gold traders is an overbought condition may be developing into the current Mar 2021 to present rally. The RSI indicator has quickly jumped from a low of 24.44 to 73.59. Near-term profit-taking can take place if gold fails to clear above the key intermediate-term resistance at 1,930.5/1,962.5-1,966. Nonetheless, the key initial support is 1,850 (200-day ma and extension of the Aug 2020 downtrend breakout). Secondary support is 1,820.5 (bottom of Mar 2021 uptrend channel), and below this to 1,767-1,776.5 (11/30/20 low and 50-day ma). The late-Apr, May, and Jun 2020 low at 1,666-1,672 and the Mar 2021 lows at 1,673-1,677 remain crucial intermediate-term support. The bottom of the Aug 2020 downtrend channel at 1,605 offers additional support.


Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com

Source: Charts courtesy of StockCharts.com

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