Investors looking to buy cheap FTSE 100 shares may have been distracted by news that the gold price has just hit an all-time high, currently standing at $1,940. You may be tempted to invest in the precious metal, especially with the stock market recovery apparently over for now.
That could prove a mistake. I still believe the stock market remains the best way to grow your long-term wealth. I would be looking to load up on FTSE 100 stocks today, rather than chase the gold price even higher.
Gold is a safe haven in times of trouble, and has performed strongly during the troubled start to the 21st century. In that time, we’ve seen the dotcom crash, 9/11 terror attacks, the financial crisis, eurozone crisis and now the Covid-19 pandemic. With every setback, investors raced to protect their wealth by piling into gold.
FTSE 100 stocks fall, precious metals shine
The gold price has been given a further boost by the long-term decline in interest rates. It pays no interest and no dividends, but that’s less of an issue when other safe havens such as cash pay less than 0.5%.
Despite its attractions, I would tread carefully. Many investors will want some exposure to the gold price. However, you have to be wary of piling into any asset when its price is at its peak.
The FTSE 100 is still 20% down compared to the start of the year. At today’s reduced prices, I believe shares offer superior long-term value. If you invested, say, £5,000 in FTSE 100 shares, your money would have grown to £6,250 by the time the index returns to its January level. Any dividends you receive will come on top.
If you leave your money invested and the FTSE 100 maintains its average total return of 7% a year, you would have £19,348 after 20 years. Leave the money invested and that would rise to just over £38,000 after 30 years.
I don’t see the gold price matching these kind of returns from today’s dizzying level.
The gold price can also crash
The gold price could fall sharply if we see signs of recovery. Right now, the world is anxiously facing a second wave of the coronavirus pandemic. Sentiment is negative, but could quickly turn, especially if we get a vaccine or treatments improve. When that happens, gold is likely to fall, and the FTSE 100 rise.
Although many FTSE 100 companies have cut their dividends, plenty of top UK stocks still offer generous yields. You will never get that with gold. Many suspended dividends will return, once the pandemic settles down, and life starts edging back to normal.
That’s why I would prefer to buy FTSE 100 shares, targeting companies that are well placed to survive the pandemic, and rebound afterwards.
Both gold and shares have a place in your portfolio. I would suggest you limit gold to a maximum 5% or 10%, and put the bulk of your long-term wealth into bargain FTSE shares.