Gold looks incredibly attractive as an investment, especially after the yellow metal’s performance this year. However, I’m not convinced it’s a good addition to an investor’s portfolio. In fact, I’d rather own cheap UK shares.
I reckon many of these businesses have much brighter outlooks and could generate higher returns in the near term.
Forget gold
In my opinion, gold can be a challenging asset to understand. On the one hand, it’s proven to be a good hedge against inflation and uncertainty in the past. Typically, the price of the shiny metal has increased in bouts of market volatility, offsetting market declines when owned as part of a diversified portfolio.
On the other hand, gold doesn’t generate any cash flow. That makes the asset difficult to value compared to UK shares. Essentially, as the investment doesn’t produce any cash. It’s only worth as much as other investors are willing to pay.
Due to these challenges, I’ve always owned some gold in my portfolio, but I tend to focus on UK shares instead. And considering the improving outlook for the economy, I think equities could be the better near-term investment.
Cheap UK shares
Over the past 20 years, the price of gold has increased at an average annual rate of around 7%. That’s not bad. But some stocks have returned over 20% per annum.
Of course, this sort of return isn’t guaranteed. But by acquiring cheap UK shares, I think I can improve my chances of generating a high annual return.
Some of the companies I’m considering right now include low-cost airline easyJet. This firm has struggled over the past few months and has had to raise lots of capital to keep the lights on. But I think the strength of its brand will help drive the group’s recovery in the long run.
Another firm I’ve owned and may consider holding again is cruise operator Carnival. The biggest company in its sector, Carnival has the size and scale required to weather the crisis.
While it might emerge in 2021 with a significantly weakened balance sheet, when owned as part of my diversified basket of UK shares, I think it may have huge potential.
Another stock I believe could have potential is travel group TUI. This isn’t a company for the faint-hearted. It’s already flirted with bankruptcy several times this year. Nevertheless, I think that after recent declines, there’s already plenty of bad news baked into the shares. The potential reward may be worth the risk of investing here.
The bottom line
All in all, I think buying cheap UK shares could be a better alternative to owning gold in the long run. However, I don’t intend to abandon the yellow metal entirely.
I think it could continue to provide a great hedge against uncertainty, which is why I plan to continue owning a small amount alongside my other investments.
