If I’d invested £1,000 in gold and the FTSE 100 a year ago, which would have performed best?

Jonathan Smith compares the performance of gold and the FTSE 100 index over the past year, and is not surprised with the result!

The content of this article was relevant at the time of publishing. Circumstances change continuously and caution should therefore be exercised when relying upon any content contained within this article.

When investing, your capital is at risk. The value of your investments can go down as well as up and you may get back less than you put in.

Read More

The content of this article is provided for information purposes only and is not intended to be, nor does it constitute, any form of personal advice. Investments in a currency other than sterling are exposed to currency exchange risk. Currency exchange rates are constantly changing, which may affect the value of the investment in sterling terms. You could lose money in sterling even if the stock price rises in the currency of origin. Stocks listed on overseas exchanges may be subject to additional dealing and exchange rate charges, and may have other tax implications, and may not provide the same, or any, regulatory protection as in the UK.

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More.

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.

The numbers

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?

Correlations

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!

Should you invest, the value of your investment may rise or fall and your capital is at risk. Before investing, your individual circumstances should be assessed. Consider taking independent financial advice.

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.

More on Investing Articles

Investing Articles

Are these the best stocks to buy on the FTSE right now?

With the UK stock market on the way to hitting new highs, this Fool is considering which are the best…

Read more »

Petrochemical engineer working at night with digital tablet inside oil and gas refinery plant
Investing Articles

Can the Centrica dividend keep on growing?

Christopher Ruane considers some positive factors that might see continued growth in the Centrica dividend -- as well as some…

Read more »

Smiling family of four enjoying breakfast at sunrise while camping
Investing Articles

How I’d turn my £12,000 of savings into passive income of £1,275 a month

This Fool is considering a strategy that he believes can help him achieve a stable passive income stream with a…

Read more »

Person holding magnifying glass over important document, reading the small print
Investing Articles

2 top FTSE 250 investment trusts trading at attractive discounts!

This pair of discounted FTSE 250 trusts appear to be on sale right now. Here's why I'd scoop up their…

Read more »

Smiling young man sitting in cafe and checking messages, with his laptop in front of him.
Investing Articles

3 things that could push the Lloyds share price to 60p and beyond

The Lloyds share price has broken through 50p. Next step 60p? And then what? Here are some thoughts on what…

Read more »

Young female business analyst looking at a graph chart while working from home
Investing Articles

£1,000 in Rolls-Royce shares a year ago would be worth this much now

Rolls-Royce shares have posted one of the best stock market gains of the past 12 months. But what might the…

Read more »

Investing Articles

Are HSBC shares a FTSE bargain? Here’s what the charts say!

There are plenty of dirt-cheap FTSE 100 banking stocks for investors to choose from today. Our writer Royston Wild believes…

Read more »

Three signposts pointing in different directions, with 'Buy' 'Sell' and 'Hold' on
Investing Articles

Just released: Share Advisor’s latest ‘Hold’ recommendation [PREMIUM PICKS]

In our Share Advisor newsletter service, we provide buy, sell, and hold guidance for our universe of recommendations.

Read more »