Should you invest in FTSE 100 stocks or gold?

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8st Aug 2024

If you’re considering investing, one of the biggest questions you might ask is whether to put your money into the stock market or gold. In May 2024, Gold reached a record high price of $2450/oz (£1925) and shows strong potential to keep climbing. Meanwhile, the value of the FTSE 100 appears to be hitting an all-time high, peaking at 8,199.95 back in April.

Both options have their pros and cons, and your decision will ultimately depend on your financial goals, risk tolerance, and investment horizon. In this article, we will do a direct comparison of FTSE 100 stocks and gold to help you decide where your hard-earned money should go.

What is the FTSE 100?

Introduced in 1984, the FTSE 100 (Financial Times Stock Exchange 100 Index) is a stock market index that represents the 100 largest companies listed on the London Stock Exchange by market capitalisation. These companies span various sectors, including finance, energy, consumer goods, healthcare, and more, making the FTSE 100 a benchmark for the UK economy.

Investing in FTSE 100 stocks means buying shares in some of the most successful and established businesses in the world, such as HSBC, BP, and Unilever. You can choose to invest in individual stocks or opt for ETFs.

Individual stocks let you invest directly in specific FTSE 100 companies, allowing you to pick shares with strong growth potential or reliable dividends. ETFs (Exchange-Traded Funds), on the other hand, offer investors the opportunity to invest in multiple FTSE 100 stocks, spreading your risk across the entire index.

Gold vs. FTSE 100: A comparative analysis

Now that you have a basic understanding of the FTSE 100, let’s compare it to gold in terms of various investment criteria.

1. Diversification

FTSE 100:
The FTSE 100 offers inherent diversification as it encompasses companies from various sectors. By investing in the FTSE 100, you’re not putting all your eggs in one basket; rather, you’re spreading your risk across multiple industries and global markets. This diversification can help reduce the impact of poor performance in any single sector.

Gold:
In contrast, gold is a single tangible asset. It doesn’t provide the same level of diversification as the FTSE 100. However, it plays a crucial role in diversifying your overall investment portfolio. Gold often moves inversely to stocks, meaning when stock markets perform poorly, gold prices tend to rise, making it an excellent hedge against inflation.

2. Short-term vs. long-term investments

FTSE 100:
FTSE 100 stocks are generally considered short-term investments when investors aim to capitalise on market movements, such as price fluctuations or dividend payouts. Traders might buy and sell these stocks quickly to take advantage of temporary trends or company-specific news, rather than holding them for long-term growth.

Gold:
Over the long term, gold tends to preserve its value during economic uncertainty, protecting your wealth when stock markets are volatile. This stability makes gold an excellent choice for long-term investment and financial security, as it consistently maintains its purchasing power.

3. Dividend yield

FTSE 100:
One of the biggest advantages of investing in FTSE 100 stocks is the potential for dividends. Many companies within the index pay regular dividends to their shareholders on an annual, half-yearly, or quarterly basis. This provides a steady income stream in addition to potential capital appreciation, which can enhance the overall return on your investment.

Gold:
Gold does not pay dividends. It’s a non-yielding asset, which means the only way to make money from gold is through selling it when its value increases. So, while gold can be a good store of value, it doesn’t generate regular income like dividend-paying stocks.

4. Liquidity

FTSE 100:
Stocks, including those in the FTSE 100, are highly liquid assets. You can buy or sell shares quickly during market hours, allowing you to react swiftly to changes or personal financial needs. However, selling in a downturn could mean locking in losses.

Gold:
Gold is also highly liquid, but it depends on the form you hold it in. Physical gold, such as bullion bars or coins, can be sold relatively quickly, but there might be a slight delay compared to selling stocks. Gold ETFs and gold-related securities offer similar liquidity to stocks.

5. Risks

FTSE 100:
A significant drawback of investing in FTSE 100 stocks is the exposure to market risks. As mentioned earlier, stock prices can be volatile and influenced by factors like economic data, political events, and company performance. There’s also the risk of individual companies within the FTSE 100 underperforming.

Gold:
Gold’s primary risk is its price volatility. Although gold is considered a safe haven, its price can fluctuate based on variables such as supply and demand, inflation, and geopolitical tensions. While it’s unlikely that gold will lose all its value, its price can be unpredictable in the short term.