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Should I invest in gold?

In tough times, investors often abandon what they see as the risk of investing in shares, and go for gold to try to preserve their capital. And with Brexit causing headaches everywhere, there’s been a bit of a gold rush in August.

That’s what Interactive Investor, the DIY investing platform provider, found, and it doesn’t surprise me. As a result, the price of an ounce of the shiny stuff has risen from $1,309 at the beginning of June to around the $1,500 mark this week.

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That’s a gain of nearly 15% in only a little over three months, so a good investment, wouldn’t you say?

Longer term

Well, you can’t judge the true value of an investment over such a short period, so what about longer periods? The gold price is up 20% over the past five years, though that does include the recent sharp rise in the past few months. If that spike hadn’t happened, we’d be looking at a gain of only around 4% – and I fully expect gold’s current buoyancy to fade once the uncertainty surrounding stock markets subsides again.

Over the past five years, the FTSE 100 has admittedly only gained 6%, but it’s also been generating dividends that would have brought total returns up to around 28%. That’s only modestly better than gold, but it’s those dividends that make all the difference and make shares a far better bet over the long run.

The problem with gold is that it doesn’t do anything. It doesn’t generate cash, doesn’t enhance the economy… nothing. It just sits there looking yellow and shiny while it’s owner hopes someone will come along later and pay more for it.

Opportunity

If you’re really too nervous to hold shares right now and feel you need the comfort of gold, that’s what you should do – at The Motley Fool we’re very strong believers in investors making their own decisions.

But I just think it’s a serious waste of an opportunity, and I feel sure that ace investor Warren Buffett would agree. Buffett doesn’t advocate trying to time the market, but instead says we should just look for great companies at fair prices, and then buy and hold them for decades.

And to that he adds his famous maxim that says we should be: “fearful when others are greedy and greedy when others are fearful.”

Top shares

What the weak sentiment toward shares has done, in my opinion, is throw up a lot of great FTSE 100 bargains. Does anybody believe that Brexit and the Trump-China trade wars are going to do any long-term damage to Royal Dutch Shell‘s long-term prospects? If you do, you’ll be missing out on yields approaching 7%.

Then there’s the whole financials sector, which is admittedly likely to suffer if Brexit goes badly wrong. But do Lloyds Banking Group shares really deserve to be valued on a price-to-earnings as low as 6.7, around half the Footsie’s long-term value? Oh, and that’s with a forecast for another 7% dividend.

Dividends for the FTSE 100 as a whole are nicely above their long-term trend, with an expected 2019 yield of 4.5%. To me that’s a key indicator that shares are undervalued. They’re not shiny, mind.

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Alan Oscroft owns shares of Lloyds Banking Group. The Motley Fool UK has recommended Lloyds Banking Group. 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.