The gold price has jumped over the past 12 months as investors have rushed to buy the yellow metal, seeking protection against market uncertainty.
However, I’m not entirely convinced gold is the most suitable asset to own in the current market. I believe investors may achieve a much better return in the long run by owning cheap shares instead.
The problem with gold
The issue with the gold price, in my opinion, is the fact that the yellow metal is a speculative asset. It’s only worth as much as someone is willing to pay. That makes it challenging to say how much it should be worth at any point in time.
On the other hand, cheap shares such as IAG are backed by hard assets, which produce cash flow. That makes it easier to suggest their worth.
IAG and its smaller budget peer, easyJet, were some of the largest airlines in Europe before the pandemic, although they’ve since lost their edge. Nevertheless, I reckon that when the air travel market recovers, these firms will see a rapid return to growth.
Pent up consumer spending coupled with the strength of these companies’ brands, will help re-ignite growth, in my opinion. This could yield large total returns for investors. Both stocks continue to trade at a discount of 50% or more to their 2020 high.
Other travel firms, such as Germany’s Tui, could see a similar bounce in demand, producing a stock re-rating.
It may be difficult for an investor to achieve the same returns from gold, especially in the near term. In the past, the yellow metal has lagged the performance of stocks in rising markets but outperformed in weak markets. As such, as the market recovers, cheap shares could prosper, but gold may struggle.
Also, gold doesn’t provide an income. Many cheap UK shares do. Take GlaxoSmithKline, for example. At the time of writing, this business offers a dividend yield of around 5%. It also trades at a discount of approximately 20% to its long-term average valuation.
These numbers suggest the stock could provide a total return of as much as 15% per annum for the next two years. I think it’s unlikely the gold price will yield the same kind of return over this period, unless there’s another market crash.
Considering all of the above, I think buying cheap shares today could yield higher returns than the gold price in the long run. As such, I reckon this may be the best strategy for an investor trying to make a million in the stock market.
Not only could investors see higher returns, but it may also be possible to generate a passive income stream, which would be impossible with gold. Owning stocks such as GlaxoSmithKline and other high-yield shares could provide a steady income to supplement an income or reinvest in the market.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has recommended GlaxoSmithKline. 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.