The rising price of gold over the past few months has undoubtedly caused investors to contemplate buying the yellow metal.
However, while the price of gold has been on a tear since the end of the third quarter of 2019, over the long term, the asset has produced relatively weak returns compared to the FTSE 100.
Moreover, even though the FTSE 100 recorded one of its best years on record in 2019, the index still appears to offer excellent value for money and the potential for high returns over the long run.
The FTSE 100 is a truly global stock index. More than 70% of the index’s profits come from outside the UK. What’s more, the value of the index is linked to these profits. To put it another way, the price of the FTSE 100 is supported by cash flows from a collection of global businesses that deal in everything from soap to iron ore to cybersecurity.
The price of gold, meanwhile, is only determined by supply and demand. There is only a limited amount of the yellow metal in the world, but if there are no buyers, it will have no value.
You don’t have the same risk with the FTSE 100. As long as the index’s constituent companies are producing an income, it should generate impressive capital growth and a steady income over the long run.
At the time of writing, the price of gold is trading around $1,600 per ounce. 30 years ago, an investor would have paid $800 an ounce. This means that over the past three decades, gold has produced an average annual return for investors of around 2.5%, excluding storage and transaction fees.
Since its inception, the FTSE 100 has produced a total return of around 9% per annum. When compounded, this additional 6.5% of growth per annum can lead to significant returns that could turn even modest sums of capital into a surprisingly big savings pot over the long run.
For example, a saver who put £10,000 into the FTSE 100 three decades ago would have £147,300 of savings today. The same investment in gold made at the same time would be worth £21,200 today.
Investing in the FTSE 100 is relatively simple and cost-effective, and you also have plenty of options when it comes to developing tax-efficient strategies to invest in the index.
Accounts such as a Stocks and Shares ISA are usually free to open, and any money stashed inside these wrappers does not attract income tax or capital gains tax, making them perfect for long-term investing. You can also set up a regular investment plan to make the most of pound cost averaging and build up your nest egg steadily over time.
So, while the gold price might look attractive based on its recent performance, the FTSE 100 appears to offer a better investment for the long run.
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Rupert Hargreaves owns no share 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.