Gold vs Shares - FTSE 100

Stocks and shares have long been the main rival to gold as an investment, with the potential for sizeable gains to be made while strong economies support the markets. Gold’s popularity benefits from bear markets, when share price reductions (often labelled ‘corrections’) reflect economic slowdown, contraction, and even recession.

The benefits of gold vs shares largely come down to risk and timing. During times of uncertainty, gold protects investors and their wealth against the devaluation caused by inflation, but gold is traditionally a long-term investment. Investors are able to realise quicker profits in some cases with stocks, and it’s that allure that makes stock markets the big rival, but at the cost of higher risk.
.

What is the FTSE 100?
.

The FTSE (Financial Times Stock Exchange) 100 is a share index owned by the London Stock Exchange. It lists the top 100 companies in the UK that are eligible through their share listings.

Known as the ‘Footsie’, the London exchange has been operational since 1984. Unlike the heavily domestic FTSE 250, the FTSE 100 is more of an international stock exchange.

The London Stock Exchange in Paternoster Square, home of the FTSE 100, 250, and 350.

.

Dividend Yield
.

One of the reasons that stocks and shares are popular is the fact that they yield a dividend - whether on an annual, half yearly, or quarterly basis. Shareholders are often paid a small return based on stock performance and the quantity of shares they own.

To calculate this, the most recent full-year dividend is divided by the company-in-question’s share price. This reveals the current dividend yield, which is the percentage of share value that is paid.

Below is a chart of the average dividend yields for the last decade in the FTSE 100, with an average value of 3.82% yield.

.

FTSE 100 Charts

Gold has enjoyed far superior price growth in recent years when compared to the FTSE 100 average. During the decade shown below, gold rose from £472 per ounce to £962.21 per ounce – a 103.85% increase in value. In comparison, the FTSE 100 average share value went from 5,787.60 points to 7,294.70 points – a much more modest rise of 26.04%.

This time period includes the financial crash of 2008/09 – a point where gold’s demand was higher following a sizeable economic crash which hurt both lending and the willingness of investors to gamble on the stock markets.

If we adjust the date range slightly from Q1 2009 to Q1 2019 to remove the crash, then we see a slightly greater average performance for the FTSE 100 compared to gold. Gold improved from £648.07 per ounce in 2009 and rose to a high point of £1,027.64 per ounce as of February 2019; a value increase of 58.56%. The FTSE 100 average, in comparison, jumped up from 3,889.06 points to 7,123.23 points as of this month – an improvement of 84.44%.

Both performances are strong, but the chart clearly demonstrates the historically-proven negative correlation between gold and stocks, with gold’s value increasing when share values were lower.

Inspired by the US stock market’s successes, the bull run of international stock exchanges since 2016 took enough demand away from gold to keep it from catching the FTSE. The strength of the US Dollar also saw safe-haven demand split between gold and USD. Despite this, gold’s 58.56% value growth is still impressive considering the factors weighing down on it.

The outbreak of Covid-19 globally, has seen governments scramble to print-money and keep economies running during a period of unprecedented shutdown of industry and services. This has seen stock markets recover and make further gains following a crash in March 2020. This disconnect between stock markets and the true global economy has raised concerns of a new potential bubble to come in the years ahead.

Gold’s big selling point has always been value retention and the ability to safeguard wealth, and the statistics don’t lie. The chart below shows that if we widen the scope of our value fluctuations for gold and the FTSE 100, we can see an astonishingly greater increase in the value of gold compared to the FTSE.

The FTSE 100 only moved from 6,175.10 points to 7,173.23 points in that time – a 15.35% increase in value and less than 1% growth per year. Gold shot up from £175.98 per ounce just before the turn of the millennium, and in 20 years it has risen to £1,027.64 per ounce – a 483.95% increase.

For a more specific comparison – utilising monetary values rather than averages – we matched gold against three of the biggest companies along with the average FTSE 100 Index share price and compared their performances in the past 18 years. The chart is based on investing an initial sum of £10,000, with the stock values calculated as their sale value plus cumulative dividend payments.

The chart demonstrates the strength of gold as both a profitable asset, but also as a safe-haven against the fluctuations of the stock-market. When the financial crisis of 08/09 began we see gold climb rapidly, and even as economies recovered the slow-growth has seen gold keep pushing higher.

Another point to be aware of is the inclusion of dividend yields in the returns shown above. There has been a recent trend for companies to pursue share buy-backs; a policy that sees the company borrow cheap money (courtesy of low interest rates) and buy back their own shares. The artificial demand drives the share price up, thus increasing the dividend yield of the stocks for investors and tempting more people to invest in the hope of getting the same high yields.

.

Gold vs Stock Market

Opportunism is everything when it comes to investing in gold vs the stock market. They will have good and bad times and knowing which to choose and when to buy is the sign of a smart investor. Many investors will also look in diversifying their portfolio, investing in both gold and stocks to reduce the risk from stocks, while still gaining some exposure to the potential gains.

In 2016, analysts forecasted a strong run for shares over gold. This came to fruition, and stock markets have performed well thanks to the intervention and money-printing of central banks. How long the stock market bull run can continue however is on the minds of many investors. A financial reckoning is due, and stock markets, as well as the companies that trade on them, will be likely targets for governments looking to claw back the trillions being spent.

Gold is more beneficial in the long term, while stocks and shares offer potentially quicker profits in the short term, but it’s all about timing. As the charts above show, buying six months too early or too late could cost you thousands, so it’s all about research.