The price of gold has dipped after a momentary rally into 2021. For gold bulls, this is an unexpected twist in its traditional role as a safe haven asset. With coronavirus strains, infections, and deaths still mounting, many investors were expecting stock prices to fall and precious metal prices to soar. The added political unrest in the US and tensions mounting in Iran should have further cemented gold’s rise. Yet, the opposite appears to be true. And of course there’s now the digital safe haven alternative of Bitcoin.
Make a million through diversification
While I think a diversified portfolio should include a little of everything, even gold and Bitcoin, right now gold is losing its lustre. If I buy £20k worth of gold today, it will take a very long time to be worth £1m. Jim Rickards, one of the world’s biggest gold bulls, predicts gold at £11.1k ($15k) an ounce by 2025. That would be an eight times return on my £20k investment, reaching around £162k. But in the past five years the price of gold has delivered a 1.8 times return, so an eight times return may be pie in the sky.
While the value of gold will no doubt increase as the years pass, it doesn’t offer any financial bonuses along the way. Meanwhile, some stocks have added rewards. Dividend payments can be reinvested, exponentially increasing the returns achieved. This is why I think the stock market offers a quicker way to make a million.
Long-term wealth generation
As an example, if I put my £20k to work in a basket of stocks that bring an annual return of 10.3%, then in 40 years my £20k will be worth £1m. If I add £200 a month, I could achieve this in 32 years. If the price of gold shoots up and stock prices fall, then it’s an opportunity to buy more of my favourite value stocks, further boosting my long-term gains.
Billionaire investor Warren Buffett says shareholders should buy when people are running scared. While some financial markets are rallying, there are still plenty of subdued stocks reeling from the effects of the pandemic and its many restrictions. This throws up buying opportunities for stocks that are currently undervalued and could realise big returns in the coming years.
Some of these may be riskier, but I look for companies I think have what it takes to survive the tough times ahead. BT, Rolls-Royce, and BAE Systems are all long-established British companies that I’m considering because I think they will emerge from the crisis and rebuild their beleaguered profit margins.
Gold stocks are another way to build wealth
And for those who love the shiny metal, gold stocks are always an option. The stronger players even offer competitive dividend yields, giving investors the best of both worlds. For example, FTSE 250 gold miner Centamin offers a 5% dividend yield. Alternatively, Greatland Gold is a FTSE AIM-listed stock that saw its share price rise 1,500% in 2020, but doesn’t offer a dividend.
Gold on its own is simply one asset, and physical gold requires safekeeping. By investing in the stock market, I can vary my investments while snapping up bargains in tough times with a view to wealth accumulation.
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Kirsteen owns shares of BAE Systems. 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.