The gold price has enjoyed a superb year-to-date performance. It has risen by around 17%, with investor demand increasing due in part to its reputation as a store of wealth during uncertain periods.
Looking ahead, the price of gold could continue to rise in the short run. Investors may retain a cautious stance towards risk as a result of threats such as a global trade war, Brexit and US political developments.
However, in the long run, the FTSE 100 could offer superior return potential compared to gold. Its recent lacklustre performance may mean that there are a number of companies that offer wide margins of safety, with the cyclicality of the index indicating that buying during periods of uncertainty can produce a more favourable risk/reward opportunity.
Income potential
Of course, a drawback of buying physical gold or a gold ETF is its lack of income. The recent fall in US interest rates has contributed to rising demand for gold, since it appears more attractive relative to income-producing assets that now offer a lower rate of return.
However, the FTSE 100’s dividend yield of around 4.3% could prove to be highly appealing to many investors. For example, investors who are seeking to generate a passive income at a time when interest rates are set to remain low may be able to obtain a portfolio yield of 5% or even 6% simply from purchasing a range of large-cap shares.
Return prospects
Likewise, growth-focused investors may be better off purchasing FTSE 100 shares instead of buying gold. The track record of the index shows that periods of decline have never lasted in perpetuity, and that the FTSE 100 has always proceeded to not only recover from bear markets, but to post record highs.
Therefore, the recent modest growth recorded by the FTSE 100 could be an opportune moment to buy stocks. The risks facing the world economy may have been factored in by investors, which could lead to wide margins of safety being on offer. Although it may take time for the discounts to intrinsic value of FTSE 100 shares to narrow, for long-term investors the index appears to represent a value investing opportunity at the present time.
Risks
While gold has a track record of being popular during uncertain periods for the world economy, its performance could be negatively impacted by factors such as improving investor sentiment and a rising US interest rate. Neither of these factors may come to fruition in the near term, but both seem likely to occur over the coming years. Therefore, the recent returns on gold may not prove to be sustainable.
By contrast, a high-single-digit annualised total return can be expected from the FTSE 100. Buying large-cap shares today, while many of them trade on low valuations, may lead to even more impressive returns over the long run. Therefore, now could be the right time to pivot from gold to FTSE 100 stocks.
