As the gold price rallies, should I dump FTSE 100 stocks?

The gold price has been on the rise over the past month, up by almost 15%. Interestingly, this explains most of the 18% increase seen over the past year. No surprises here. Historically, the yellow metal is considered the best hedge against all other investments, including FTSE 100 stocks, when there is either real or perceived danger that things could really go south. The war may have started between Russia and Ukraine, but its economic repercussions can already be felt around the world as inflation rises further because of runaway fuel prices. 

Why the gold price could come off

This is in no way a signal urging investors to press the panic button, but an assessment of the situation as it exists right now. I mean, it is theoretically possible that peace may be struck between the two countries, sanctions on Russia could be removed, and oil and gas prices could subside. This would logically lead to a more optimistic outlook on the global economy and the stock markets. And less insecurity could deflate gold prices.

Why it could stay high 

On the other hand, it is also possible that we see a prolonged war that continues to create challenges. Europe, for instance, is heavily dependent on Russian gas. This creates both economic and ethical challenges for much of the continent. As gas prices continue to rise, inflation will rise, further weakening European economies while at the same time making Russia richer. 

This also undermines the efforts of governments around the world to discourage support to the Russian government, including the UK. In fact, they wind up inevitably supporting the country, because alternatives to the country’s gas supplies are not that easy to find, as Germany has been reiterating recently. 

What could happen to FTSE 100 stocks

This in turn could continue to keep the stock markets sluggish. The FTSE 100 has dipped since the start of the war, and has not gone back to the highs of early 2022, when it was a heartbeat away from 7,700. But it could be good for the gold price. Not necessarily gold stocks, to be sure. One of my gold-related investments is in the FTSE 100 Russian miner Polymetal International. I do not even want to get started on how badly it has been doing in the past days!

What I’d do now

So, to answer the question asked in the title, I think there is a case for buying gold. As there always is. I have long been a believer that a small proportion of my investments should be in gold because it can be the safest asset in times like this. And if I can hold it in physical form (not my favourite idea), that is even better. But I am not about to dump stocks, either. I have been a stock market investor for a long time and it has held me in pretty good stead. 

The balance of probability indicates to me that while we are in a period of rising risk, there is also a good chance that we can come out of it relatively unscathed. So, I am buying solid FTSE 100 stocks while they are still low, but also increasing my gold holdings.