Forget gold! I’d buy dirt cheap shares now and hold them for decades

While gold remains a popular refuge from volatility, investing money in top-notch, dirt cheap shares for the long run could produce far better returns.

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Buying gold in 2023 may seem like a better idea than investing in cheap shares. After all, the ongoing economic volatility has certainly sent the stock market on quite the rollercoaster ride. Meanwhile, the price of the shiny yellow metal has been steadily rising since the start of the year.

Gold has always been a popular refuge from inflation. But as strange as it seems, I think buying high-quality stocks trading at depressed valuations may be a far better inflation hedge in the long run.

Even for boring blue-chips, the recovery potential can achieve impressive market-beating returns that far outpace inflation.

Gold on track to drop?

Defensive asset classes have almost always outperformed throughout history when economies decide to throw a tantrum. But as pessimism subsides, capital eventually gets shifted back into growthier asset classes like stocks. And, subsequently, an interesting pattern emerges.

When the stock market begins to recover, the price of the precious metal typically starts to fall. In fact, we’ve already seen early indicators of this happening since April. Gold prices are down around 6% in the last four months. Meanwhile, the FTSE 100 is up by around 1% over the same period, after dividends.

A 1% rise is hardly anything to get too excited about. But with stocks now performing better than gold, the tide might be turning. And with so many shares still trading at seemingly dirt cheap prices, this may be just a tiny taste of what’s to come.

Opportunities in the stock market

The stock market has a pretty solid track record of recovering from even the worst economic crashes. But that doesn’t mean every sold-off stock is a bargain. In some cases, the pessimism surrounding certain companies may be justified.

I personally see rising interest rates as a short-term challenge. But there’s no denying such an aggressive shift in monetary policy will profoundly impact companies, especially overleveraged ones.

Even the biggest industry leaders may find themselves in the hot seat as higher borrowing costs eat away at margins, creating opportunities for smaller disruptive start-ups.

Therefore, the biggest opportunities within the stock market today may not be the leaders of previous years. But rather the firms that are well-capitalised, financially nimble, and have the capacity to secure and retain market share. And investing in these enterprises while they’re cheap could only amplify the returns.

The bottom line

Given time, a diversified portfolio of top-notch stocks bought at discounted prices can massively outperform inflation, gold, and flagship indices like the FTSE 100. But that doesn’t mean defensive asset classes serve no purpose.

Gold may still be a sensible investment for those seeking to protect their existing wealth rather than grow it. But since I don’t fall into this category yet, the stock market looks like a far better opportunity, in my eyes.

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.

Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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