The gold price is a safe haven investment — a sheltered harbour in stormy waters for investors.
Indeed, over the past few weeks, as stock markets around the world have whipsawed, the price of gold has jumped. It traded as high as $1,680 per ounce at the end of February, up from $1,550 at the beginning of the year.
As such, the yellow metal looks like an attractive investment in the current market environment. However, gold isn’t a sensible long term investment.
While the asset might offer stability in falling markets, over the past three decades, it has returned just 4.7% per annum. By comparison, since its inception three and a half decades ago, the FTSE 250 has produced a compound annual return of 12%.
A better buy
These numbers suggest investors would be better off buying the FTSE 250 as a long-term investment.
A lump sum of £1,000 invested for 35 years, at an average annual rate of return of 12%, would become £65,000. The same £1,000 invested at 4.7% would be worth just £5,200 after three-and-a-half decades.
It’s impossible to predict what the future holds for the stock market in the short term. Nevertheless, in the long term, it’s highly likely the FTSE 250 will continue to outperform gold.
Gold is only worth as much as someone is willing to pay for it. That makes the asset somewhat of a speculative proposition. By comparison, the FTSE 250 is a collection of productive companies, all of which produce cash flows.
Most of these companies can increase prices in line with inflation, which means earnings should grow steadily over in the long run. The same can also be said of their dividends.
Gold doesn’t offer a dividend, and because it doesn’t produce any cash flow, there’s no guarantee its value will rise over time.
While the FTSE 250 might have more domestic exposure than its blue-chip peer, the FTSE 100, the index’s constituents still offer broad global diversification. They also provide sector diversification. If you buy the gold price, there’s no diversification. You are just betting on the rising price of one commodity.
Gold stocks
If you have to add gold to your portfolio, gold stocks might be a better option than the yellow metal itself. Miners are volatile investments, but they usually offer a dividend, unlike the commodity.
What’s more, some producers have costs below $1,000 per ounce. That suggests they’re making substantial profits at current levels. This cash could be returned to investors with bigger dividends, or share buybacks.
Interestingly, until the beginning of February, over the past five-years, a basket of gold and silver mining stocks outperformed the gold price by around 15%.
So overall, all while the gold price might look attractive after recent gains, if you’re investing with a long-term time horizon, the FTSE 250, or a basket of gold and silver mining stocks, could be the better investment.
