Gold vs Stocks: Where Should You Park Your Cash?

Royston Wild considers whether investors should invest in precious metals or share markets.

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The gold price has regained some of its lustre in recent weeks, bouncing from the five-year lows of $1,080 per ounce punched back in July to current levels around $1,170. Consequently many investors have been moved to ask: could the so-called ‘hard currency’ be set to enjoy a further bump higher?

A historical mismatch

Gold famously enjoyed a decade-long bull run that saw it post chunky gains from the dawn of 2001 right through to the close of 2012. But it was the aftermath of the 2008/2009 banking crisis that led to the yellow metal’s finest hour, the commodity doubling in value in less than two years to top out at $1,920 in September 2011.

So how does the metal’s ascent compare with gains in the stock market during the period? Well, while gold has gained a mammoth 332% from then until the present time, the FTSE 100 has risen just 4%. The mismatch was thanks in no small part to the ‘dotcom’ bubble at the turn of the millennium, and the aforementioned collapse of Lehman Brothers in 2008, on risk appetite across the globe.

Indeed, these economic travails — helped in some part by significant weakness in the US dollar, not to mention loose monetary policy from the world’s central banks — saw investors embrace ‘flight-to-safety’ asset gold with open arms.

But looking ahead, I believe that gold’s race is well and truly run, and that stock markets should continue to reassert their dominance.

Inflation set to remain ultra-low

Gold has been suffering from a crisis of identity since those halcyon days of 2011, and although plenty of macroeconomic uncertainty continues to unnerve investors — from fears of a Chinese economic ‘hard landing’ through to nagging doubts over the future of the eurozone — I believe the metal lacks the necessary fuel to reclaim its glory days.

Indeed, an environment of persistently-low inflation removes a key demand driver for the metal. And I believe this likely to remain regardless of fresh monetary easing by the People’s Bank of China last week, and whether doveish comments from ECB chief Mario Draghi leads to fresh measures in Europe. On top of this, the world remains braced for belt-tightening from the Federal Reserve, a ‘when-rather-than-if’ scenario that threatens to suck vast amounts of liquidity from the system.

And should Fed chair Janet Yellen start winding down the printers as the rest of the world eases, this is likely to push the value of the US dollar still higher, another negative situation for greenback-denominated gold.

Another headache for the precious metal is that physical demand from India and China — by far the world’s two largest gold markets — also remains subdued compared with that of recent years. Indeed, bullion dealers in India have commented that sales ahead of this year’s festival season has been sluggish, with off-take hindered still further by gold import controls.

Stocks over gold

While current macroeconomic troubles could continue to hinder a solid breakout for the FTSE 100, in the long-term I believe stocks remain a more attractive investment destination than gold. Firstly, share investing gives one the ability to purchase a wide range of companies spanning a multitude of sectors, each of which services investors with very different risk/reward profiles.

And if you pick a winner then the gains can be even more stratospheric than that of gold — British microchip manufacturer ARM Holdings, for example, has seen its share value gallop more than 900% higher during the past 10 years alone!

Besides, the business of stock investing often provides the added bonus of dividends, something that ‘store-of-value’ gold does not afford. Generally speaking, I believe there is plenty of fuel in the tank for global stock markets to rise, a statement I’m afraid I cannot stretch to the gold price.

RISK WARNING: should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice. The Motley Fool believes in building wealth through long-term investing and so we do not promote or encourage high-risk activities including day trading, CFDs, spread betting, cryptocurrencies, and forex. Where we promote an affiliate partner’s brokerage products, these are focused on the trading of readily releasable securities.

Royston Wild has no position in any shares mentioned. The Motley Fool UK has recommended ARM Holdings. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

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