The FTSE 100 has crashed over the past few weeks. Following this decline, some investors have rushed into gold, in an attempt to protect their wealth.
However, this could be a big mistake. Over the long run, shares have proven to be a much better investment than gold.
FTSE 100 bargains
As the FTSE 100 has declined, some fantastic bargains have emerged. Blue-chip businesses that were trading at eye-watering profit multiples just a few weeks ago are now dealing at some of the cheapest levels in a decade.
On the other hand, the price of gold has surged.
This presents a dilemma for investors. FTSE 100 stocks now look cheap, but they could decline further in the weeks ahead. The price of gold, on the other hand, could increase over the coming weeks as uncertainty prevails.
The big difference between the price of gold and the FTSE 100 is the fact that the price of gold is determined by supply and demand. Meanwhile, cash flows from the underlying businesses determine the value of stocks and shares
As most companies are now facing an unprecedented operational environment, it’s challenging to determine the value of these enterprises.
Nevertheless, over the long run, the economy will likely return to normal. When it does, investors who are brave enough to buy at the bottom should be well rewarded.
That’s why I would buy FTSE 100 shares for a passive income in the current environment. While it is difficult to tell what the future holds for markets in the next few weeks and months, over the long term, the global economy should return to growth. Stocks should follow a similar trajectory.
It is difficult to say with any certainty whether or not the same will happen to gold.
As the price of gold is determined by supply and demand, if demand drops suddenly, the price could plummet. There’s a good chance that when things return to normal, investors will quickly lose their attraction to the yellow metal.
Another factor to consider is the income appeal of FTSE 100 stocks. Over the past decade, the FTSE 100 has supported an average dividend yield around 4.5%. Over the same timeframe, investors have had to pay out money to own gold. Most gold funds demand an annual management fee, and owning physical gold can be extremely expensive.
Gold and stocks
Put simply, while FTSE 100 stocks might look less appealing than gold right now, the figures suggest that over the long run, blue-chips are a better buy than the yellow metal.
That being said, nothing is stopping you from owning gold in your portfolio. Indeed, some portfolio managers recommend devoting 10% of your portfolio to gold and investing the remainder in stocks. For investors who are not sure about the right course of action to take, this could be a good option.
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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.