The gold price is surging again, but that doesn’t tempt me. I’d rather buy dirt-cheap FTSE 100 stocks that have been falling lately. But does that make sense?
Surely it would be wiser to buy an in-demand asset such as gold? You might think so, but I don’t. Gold may be racing towards its all-time high, but that makes me wary rather than excited.
By contrast, the FTSE 100 has been sinking again. Investors fear Covid-19 hasn’t been licked. They dread another lockdown. Instead of a V-shaped recovery, we may get an unruly scribble. It could end in another stock market crash.
Despite that, I reckon today’s dirt-cheap FTSE 100 stocks look a more tempting option than buying into pricey gold.
The gold price is near its record
Today, the precious metal trades at $1,763. That is the highest level for more than seven years. Long-term investors have done well out of gold. The precious metal is up 25% in the last year, and 50% measured over five years.
There are good reasons why it is shining today. A resurgence in coronavirus in the US, Latin America, Germany and others has spooked stock markets. The uncertain US-China trade deal adds to tensions. Also, 10-year US Treasury bonds yield just 0.69%. This reduces the ‘opportunity cost’ of holding gold, which does not pay any interest at all.
There is another reason the gold price is climbing. To combat Covid-19, central bankers and governments around the world have unleashed fiscal and monetary stimulus on a scale never before seen. Many investors think this will trigger inflation further down the line. Gold is a traditional inflation hedge. You cannot print it, as you can with fiat currencies.
I’d still buy dirt-cheap FTSE 100 stocks
I see why the gold price is rising, but remain wary. I am always reluctant to buy any asset class when it looks this expensive. It leaves you vulnerable to a correction. I prefer to go shopping for bargains. Right now, that means FTSE 100 shares.
The index is still almost 20% below its January peak. It is full of bargain stocks, just waiting to be snapped up. I have highlighted some of the best FTSE 100 bargains in other articles. Companies such as Diageo, Unilever, Informa and Legal & General Group.
There are other dirt-cheap FTSE 100 stocks worth considering. I would target firms with steady revenues, loyal customers, strong defensive ‘moats’ against competitors, manageable debt levels and ideally, a continuing dividend payout. These factors all point to a company that is well placed to survive today’s recession, and thrive in the aftermath.
Many serious investors will want some exposure to gold. Maybe 5% or 10% of their portfolio, to balance risk elsewhere. But in the longer run, I believe the FTSE 100 will deliver a superior combination of capital growth and income.
That’s why I am buying FTSE 100 stocks while they are still dirt-cheap.
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Harvey Jones 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.