Gold has been on the minds of many investors over the past month. This has been due to the safe haven qualities the commodity has. From a historical point of view, gold tends to perform well during periods of uncertainty. Due to the Covid-19 pandemic, you can definitely term it a period of extreme uncertainty for many of us.
Just look at the FTSE 100. The index represents the largest 100 public listed companies in the UK. Whereas the FTSE 250 has a more domestic tilt to it, the vast majority of businesses in the FTSE 100 index are global in nature. This means that whatever the economic situation is like in general, these firms will feel the impact.
So in a battle of the asset classes, given all of the events of the past year, how do the two compare as investments? To give a fair comparison, let’s say I invested £1,000 into both physical gold and into a FTSE 100 tracker fund 12 months ago.
First, the results. £1,000 placed in gold would currently be worth £1,347, giving a profit of just under 35%. By comparison, the FTSE 100 investment of £1,000 would be worth around £790, losing 21%. From this, gold shines (if you’ll pardon the pun) as the clear winner. But is that the full story?
I wasn’t surprised by the results. In fact, I would have been checking the numbers again if the stock index had beaten gold! This is because gold and stocks have a negative correlation. This means that when gold rises in value, stocks usually fall. The reasoning behind this can be seen from my opening paragraph.
Gold is bought heavily when investors are worried. This is the complete opposite to stocks. When investors are nervous and scared, most tend to sell the stocks they own. Stocks (and the index itself) tend to have much higher volatility than other asset classes such as gold or bonds. If you do not want this higher volatility right now; sell stocks and buy gold.
Good times vs bad times
But the test we ran could have given us completely different results if it had been run during a period of the bull market which went on for more than a decade. For example, if we ran the comparison for 2012, 2013 or 2014, you would have seen the FTSE 100 index outperform the gold price every time.
So it’s not as simple as saying either gold or stocks are a better investment. As a long-term investor, I acknowledge there will be good times and bad. The bad (such as now) will allow gold to perform better, but the reverse will be true during the very many good years. So it’s best in my opinion to hold both stocks from the FTSE 100 index and gold. This allows me to protect myself whatever the global risk sentiment is like. It also allows me to have better returns overall rather than being completely invested in either asset class exclusively. But the weighting of my portfolio will always be mostly towards stocks as the dividends they pay (compounded over many years) are what can really help the portfolio’s value to grow.
And one final point regarding that test. I bet if I spent £1,000 on stocks now (when many solid companies are at bargain prices), it would be worth a lot more in 12 months’ time!
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Jonathan Smith and The Motley Fool UK have 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.