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£3,000 to invest! Should I buy gold or cheap FTSE 100 shares?

An escalation in US-China trade tensions is steadying the price of gold as many investors still prefer its safe-haven appeal over stocks. However, with many shares sporting cheap valuations, this may be an opportune time to invest in the FTSE 100. If you have £3k to invest and are considering your options, I think the stock market could be a wise place to put your funds.

Gold as an investment

The price of gold has generally been rising since October. The economic uncertainty that a looming Brexit brought to Britain in 2019 pushed the price of gold up steadily. The economic fallout from the coronavirus then compounded this.

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So, is gold as an investment a viable option? I think it is a sensible addition to a diversified portfolio of assets; however, I do not think it wise to put all your savings into gold. The gold price falls as soon as positive sentiment towards recession recovery emerges. Besides, history has taught us that those brave stock market investors buying shares during periods of uncertainty reap the rewards over more cautious investors.

Is the stock market crashing?

Since the 23 March stock market crash, investors have been watching with bated breath for a repeat of the same. Although volatility has been apparent, the FTSE 100 and FTSE 250 have generally been heading north. None of us yet know the full extent of the financial fallout from the coronavirus pandemic, so the stock market may well fall again. With employment declining fast, severe market contractions are increasingly likely.

A downturn is undoubtedly a scary time to invest in stocks, but it can prove to be the most lucrative. Buying stocks low and selling high is the key to successful stock picking. But for value investors, the crucial factor is to buy and hold for many years. Holding for the long term means riding out the storm and ignoring fluctuations by assuring yourself that the companies you own shares in are quality businesses that will go the distance with growth and recovery.

So, if that is the case, which stocks look cheap right now?  The most obvious sectors to look for cheap stocks are those that have been the hardest hit by the pandemic. Therefore, airlines, hospitality, and tourism are all prime targets. However, as the economic future of these industries remains uncertain, these are sectors that still carry an element of risk.

Doubling down on defence

One cheap FTSE 100 share I still like the look of is BAE Systems (LSE:BA). BAE is a defence stock and supplier to both the UK Ministry of Defence and the US Department of Defense. The BAE share price is now below £5, down from a high of £6.70 earlier this year. It has a price-to-earnings ratio of 10 and earnings per share are 46p. 

Along with the coronavirus pandemic, the world is still contending with the US-China trade war, Brexit, and oil production disputes, all of which heighten geopolitical tensions. Therefore, I imagine government spending on defence is unlikely to decrease. The company suspended its final 2019 dividend, in response to the disruption caused by the pandemic. However, BAE has access to a £2bn revolving credit facility, is expected to complete two acquisitions, and is focussed on increasing orders. I think its share price will recover. 

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Kirsteen has no position in any of the shares 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.