Gold is having a great run at the moment. Recently, it hit record highs. Now, I’m not averse to owning a little bit of gold in my investment portfolio as the precious metal has some attractive attributes. However, I reckon I can build my wealth faster by investing in undervalued UK shares.
Gold could keep rising
There are certainly reasons to be bullish on gold today.
The commodity tends to perform well when there’s economic uncertainty. And right now, there’s lots of it.
For a start, we could see a recession in 2024 as the lag effect of higher interest rates kicks in. Second, we have conflict in multiple areas of the world.
But the thing is, looking at gold price forecasts, they don’t get me that excited.
Currently, a lot of forecasts are around the $2,100 to $2,200 per ounce mark.
That’s less than 10% above the current gold price.
Even if gold was to rise to $2,500 per ounce, that would only represent a gain of about 20%.
Ultimately, I reckon I can do better than this with other asset classes.
UK shares look cheap
One asset class that I think has more potential right now is UK small-cap (that is, smaller companies) shares.
Over the last two years, a lot of UK small-caps have been crushed as interest rates have risen.
This has left many high-quality businesses trading at very low valuations.
Take Volex, for example. It’s a British manufacturing company that produces power products for the electric vehicle (EV), data centre, and healthcare industries.
Right now, it trades on a price-to-earnings (P/E) ratio of just 12.
That’s despite the fact that revenues from EVs and data centres are surging and the company has a long growth runway ahead of it.
MacFarlane is another good example. It’s a small packaging company that has an excellent track record when it comes to growth.
And right now, it’s trading on a P/E ratio of just nine.
To my mind, both of these companies are trading significantly below their true value.
Explosive returns on the horizon?
Now, at some stage in the near future, I expect UK small-cap shares to bounce back (possibly when interest rates start to fall).
And I think the returns could be explosive.
Recently, valuations across the small-cap space have returned to levels near those seen during the Global Financial Crisis of 2008/09.
And according to investment manager Montanaro, when valuations have previously reached these levels, returns over the subsequent five years for this area of the market have been between 100% and 150%.
These kinds of returns excite me.
It’s worth pointing out that small-cap shares can be volatile. They’re not really suitable for risk-averse investors seeking capital preservation.
But for long-term investors with a higher tolerance for a risk – like myself – they can offer the chance to build serious wealth.
