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Forget gold! I’d invest £5,000 in dirt-cheap FTSE 100 shares today

The uncertain outlook for the UK economy may be causing many investors to buy gold, either in physical form or through an Exchange-Traded Fund (ETF). While this may seem to be a shrewd move following the precious metal’s rise since the start of the year, over the long run the FTSE 100 could offer a more profitable investment opportunity.

As well as offering greater diversity and an income return, the FTSE 100 could deliver higher returns over time. Its current low valuation may present buying opportunities that make it a good time to capitalise on investor fears.

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Income appeal

While buying gold miners can produce an income for investors in the form of a dividend, a gold ETF, or holding physical gold, means there’s no income return. This may not prove to be an issue in the short run – especially if the gold price keeps moving higher – but it could mean investors miss out on a substantial return over the long run.

In fact, the FTSE 100 currently yields over 4%. When compounded, this could lead to a significant return over the long run without capital growth being added. And, with many FTSE 100 stocks currently yielding in excess of 4%, it may be possible for the income return of a portfolio of those index stocks to beat the gold price over the coming years.

Growth potential

Gold may remain popular over the short run. Investor fears seem to be high regarding issues such as a global trade war, Brexit and the future performance of the European economy. When combined, they could cause investors to become increasingly risk averse, which may lead to a focus on defensive assets such as gold that have historically been a store of wealth.

While this strategy may help to protect wealth in the short run, over the long run it could lead to disappointing returns. The popularity of gold may decline during a bull market, which could mean investing in the FTSE 100 produces higher returns than the precious metal in the coming years.

Moreover, with the top index having always recovered from its challenging periods, investors may be able to outperform it simply through buying when other investors are fearful. As such, for those who wish to ‘buy low and sell high’, purchasing shares, rather than gold, could prove to be the logical response to declining stock prices.

Takeaway

While gold miners may be appealing investments, holding your capital in physical gold, or in a gold ETF, may lead to an opportunity cost in the long run. The FTSE 100’s income prospects and valuation suggest that it offers a favourable investment outlook. Therefore, buying bargain stocks while investor sentiment is weak may be a better idea than seeking to make a short-term gain on the gold price.

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Peter Stephens has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.