Is gold a better buy than the FTSE 100?

Since the turn of the year, gold has significantly outperformed the FTSE 100. In fact, while the UK’s leading share index has fallen by around 1.5%, the price of gold has surged by almost 18% and many investors may be wondering if this level of outperformance will continue.

A key reason for the FTSE 100’s disappointing performance this year has been fear and uncertainty among investors. With there being a number of risks to global economic growth, an increasing number of investors have taken a risk-off attitude and have sought to invest in lower-risk assets, such as gold. This has caused demand for shares to come under pressure and with the FTSE 100 and other global indices being highly volatile in 2016, many investors have been happy to wait for a less uncertain period in which to invest.

Of course, this higher volatility has caused gold to become more popular, as it’s perceived as a store of wealth during economic difficulties. Furthermore, gold has benefitted from a slower than expected rise in US interest rates since the turn of the year. Following the Federal Reserve’s decision to increase rates late last year, it now appears unlikely to raise them again as quickly as had been planned. This is at least partly because of the volatility present in stock markets in 2016, with further volatility likely to cause gold’s price to rise as monetary policy tightening becomes less likely.

Interest rate rises imminent?

Clearly, the Federal Reserve is likely to increase rates at some point in 2016. This could even happen as soon as next month and if rates do rise then the price of gold could come under a degree of pressure. That’s because interest-bearing assets will become more appealing relative to their non-interest-bearing alternatives. And while gold has performed well this year, further gains could be more limited over the medium term.

As a result of this, the FTSE 100 appears to be a better investment than gold. That’s partly because it appears to offer excellent value for money at the moment, as evidenced by its 4% yield, but also because the long-term outlook for the global economy is generally positive. For example, China is gradually transitioning towards a consumer-focused economy and the US continues to report upbeat economic data. And while the Eurozone is still struggling to grow and there’s a risk of a Brexit, the long-term outlook for the world economy remains highly encouraging.

In the short run however, economic shocks can’t be ruled out and in such a scenario, gold could continue to outperform the FTSE 100. However, for long-term investors and especially those seeking an income during a time of ultra-low interest rates, the FTSE 100 appears to be the better investment of the two at the present time.

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Peter Stephens 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.