Head To Head: Gold vs The FTSE 100

Gold has been so far been one of the few winners in investing this past year. With some shares on the rocks, and with worries about global growth, gold has been rising. But will gold beat the FTSE 100?

A metal defined by its history

So why do people buy gold? After all, it’s just a shiny lump of metal with a few industrial uses. Unlike shares, it’s not part ownership of a company and it pays no dividends. Your aim is simply to buy it at a low price, and sell it at a high price.

What was gold originally? Well, it was mined from the ground, and stamped into coins, which were exchanged for clothes and food — it was a currency, perhaps the original one after the barter system. And what’s a currency? Well, it’s basically a store of value. Investors will say: “I don’t believe that shares will go anywhere, so I’d rather invest in gold — after all, it is the best store of value that there is.”

That’s why, in bear markets, when share prices are falling, when bonds are yielding very little, when economies are in the doldrums, you turn to gold. It’s a metal defined by its history.

OK, so enough preamble. Should you invest in gold or in the FTSE 100? Well, gold has had an incredible run, rising from $250 an ounce in 2001 to $1,800 per ounce in 2011. But since these highs, it has been sliding down to around $1,200 per ounce. Recent rises have taken it up to $1,248 per ounce.

Yet it seems we’re in the throes of a 16-year equity bear market that has seen shares bumping along the bottom. I suspect this malaise in the markets may give gold the impetus for a last hurrah. For those who like to trade commodities, I think gold may have one more push upwards, from which you could make a profit.

Long-term, shares are a better bet

But if you’re looking to invest for the next 10 years, then there’s no question that the long-term trend for gold is down, while the long-term trend for shares is up. I think that gold will fall in line with other commodities such as oil and iron ore. That’s why I would advise investors who currently hold gold to steadily sell their holdings, and to start investing in shares.

And if you’re buying into shares, be choosy over what you pick: invest in shares that will benefit from the global boom in consumerism. Pick shares not only from the FTSE 100, but from AIM, and from fast-growing emerging markets such as China and India.

To cut a long story short, the FTSE 100 beats gold hands down.

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Prabhat Sakya has no position in any shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.