With inflation finally cooling, gold prices are starting to lose steam while FTSE 100 shares are on the march. The UK’s flagship index has proven to be fairly resilient in the current economic climate. But looking closer, this defensive performance was largely being driven by a handful of its largest constituents like AstraZeneca.
However, with economic conditions improving, many of the FTSE 100 shares hit hard by inflation are starting to make their comeback. And by capitalising on these stocks while they’re still cheap, investors could unlock substantial returns in the long run.
Gold vs FTSE 100 shares
Gold has long been used as a safe haven during times of uncertainty. The shiny yellow metal is a proven inflation hedge that can provide stability and diversification to an investment portfolio. But during a stock market recovery and subsequent bull market, it’s rarely delivered any meaningful returns.
Therefore, investors seeking to grow their wealth rather than protect it will likely find more success by focusing on FTSE 100 shares.
There are still plenty of issues plaguing the financial markets today. Further interest rate hikes are likely on the horizon. This is particularly problematic for companies riddled with floating-rate debt. But with consumer spending slowly recovering, the cash is starting to flow once more, allowing businesses to improve their financial situations.
Subsequently, the Economy Forecast Agency recently revamped its index predictions. While forecasts always need to be taken with a pinch of salt, if accurate, it indicates that FTSE 100 shares may be on track to enjoy double-digit growth in the next 12 months.
Managing expectations
While the stock market may look primed to surge in the coming months, there’s no guarantee that it will. After all, the risk of a recession still isn’t zero. And with geopolitical conflicts still creating supply chain woes, the recovery process for some businesses may take longer than expected.
All of this is to say that in the short term, the upcoming performance of FTSE 100 shares is nearly impossible to predict. And stock prices may actually take a turn for the worse, leaving investors disappointed.
However, in the long run, the situation looks far more encouraging. Since its inception, this index has endured multiple recessions, crashes and corrections. And while there’s been a lot of variability in the recovery time, the stock market has always eventually emerged stronger.
A patient investor buying high-quality UK shares trading at depressed valuations could unlock higher returns over the next couple of years. Buying low and selling high is the main method of building wealth in the stock market. And doing it in 2023, in the middle of what appears to be a stock market recovery, could even accelerate the timeline to retirement.
