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Gold or FTSE 100? My pick for 2020

Another day, another temperamental tweet from Trump, a plan to suspend Parliament as part of the Brexit drive, and yet another wild swing in the global financial markets. Red flags for the global economy have been going up since early 2018. Now it seems we’re heading towards a tipping point. 

By 2020, I believe the trade war between the world’s two largest economies will finally be reflected on corporate balance sheets. Bear in mind that these balance sheets are already over-leveraged. The UK’s private debt-to-gross domestic product hit 224% last year. A hard Brexit and consequent devaluation of the pound could magnify this debt burden further. 

Despite these concerns, I haven’t lost faith in the British economy. The country is still home to a number of excellent companies that might see their valuations subside alongside the rest of the market if a recession hits soon. Some FTSE 100 stocks have globally diversified income streams, strong balance sheets, low debt and encouraging long-term prospects. 

However, even the best stocks struggle to retain their value when the economy falls apart. If a recession is likely, some argue, it’s better to protect your assets and get back in at the right time. The preferred option seems to be gold, which has earned a reputation as a recession-beater. 

The market price of an ounce of gold was up 48% between 2007 and 2009, while the FTSE 100 lost over 40% of its value. Since 2015, gold’s value has bolted 45%, while the FTSE 100 has remained effectively flat. 

This surprising trend has even caught the attention of some well-respected financial giants. Ray Dalio, founder of the world’s largest hedge fund, Bridgewater Associates, recently said he was adding gold exposure to the portfolio to hedge against a downturn. 

My pick

I appreciate the argument that gold exposure may help me hedge against a potential downturn, however that hedge comes with an opportunity cost. Recessions are unpredictable, which means my chances of timing my investments perfectly, whether in stocks or gold exchange-traded funds, are minuscule. 

Also, gold doesn’t have the ability to grow exponentially the way some companies do. There’s a finite amount of gold on the planet and the price action hinges entirely on the supply-demand dynamics in the market. Of course, the price could spike in a downturn, but that means the value of each ounce will subside once the storm passes. 

Gold’s price plummeted from above $1,900 to under $1,200 as the world recovered from the financial crisis between 2009 and 2015. Meanwhile, some companies have paid out billions in dividends and some technology companies have multiplied their valuations at a phenomenal clip over that same period. Even blue-chips like Diageo have nearly quadrupled since 2009.

Foolish takeaway

It’s hard to argue with gold’s track record as a hedge against economic crises. With the global economy on the verge of a slowdown, now might be the best time to add some exposure to the yellow metal. 

However, I don’t have the confidence to time my bets and I’m worried about missing out on some fantastic companies at attractive valuations, which is why I’ll stick to stocks even if a recession hits. 

The ongoing chaos has pushed FTSE 100 valuations and dividend yields to attractive levels. It now seems like the perfect opportunity for me to accumulate some individual stocks or even a broad index fund that tracks the whole market. 

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VisheshR has no position in any of the shares mentioned. The Motley Fool UK has recommended Diageo and Diageo. 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.