Since the FTSE 100 started its vaccine rebound in November, the gold price has started to dip. Around $1,800, it’s down from the $2,067 peak it hit in August. But it’s still up more than 20% since the start of 2020. So was it a good idea to dump shares and buy gold through the summer?
I can only see the answer as no. A lot of investors have been following what looks to me like a rather unfortunate path. People have been selling shares after they slumped, and chasing the gold price up and up. Now shares are coming back and gold is falling again. So they’re selling gold, for less than they paid for it in many cases. And they’re buying back into shares, very likely at more than they sold them for. That’s not a winning result.
Wealth preservation
Now, some might argue that buying gold this year was not about making money. It was about accepting minimal losses to reduce the chances of much bigger ones and preserve as much wealth as possible. Had Covid-19 been even worse and taken a bigger toll on the world economy, stock markets might have tanked far harder.
But if I had £20k to invest this year, I reckon I’d have missed a terrific opportunity by going for gold. And it’s not just about the short-term difference in prices. For me, it’s mostly about long-term dividends and the effective yields I can get. I’ll explain with an example.
Suppose I liked the look of a share offering a 6% dividend yield at the start of the year. And then let’s imagine the share price fell by a third during the stock market crash. Many slid a lot further, but most of the biggest fallers came with individual risks too. So I’ll stick with a middling example rather than going for an extreme.
Better effective yields
After the one-third fall in value, the same dividend (in cash terms) would then provide a 9% yield. So if I bought after the crash rather than before, the same investment would get me 50% more in dividend cash. Now, of course, a lot of dividends were cut too. While gold was gaining in value, the forecast dividend yield of the FTSE 100 dropped from 4.7% to about 3.2%.
But even if dividends fell, I expect most to get back to their long-term levels within the next couple of years. And once that happens, I’ll be enjoying bigger yields for all of the years to come based on my actual purchase prices during the crash. And that, I reckon, could add up to a lot more than 2020’s gains and losses.
Dividends or gold?
So if I had £20,000 to invest right now? It wouldn’t go near gold, for sure. A Barclays study found that UK shares have historically provided average returns of 4.9% above inflation, for more than a century. And buying when shares are cheap would provide an extra starting boost. So I’d put my £20,000 into a Stocks and Shares ISA. And I’d buy top FTSE 100 dividend shares, to lock in some extra special yields in the coming years.
And then I’d add to it monthly, reinvesting all my dividends, until I retire.
