Beware of gold as it surges towards a record high. Shares offer a better long-term outlook

Questor Wealth Preserver: the unpopularity of stock markets presents a buying opportunity for long-term investors

Undated handout photo issued by the Royal Mint of gold bullion, as a jump in gold investments has been recorded by the Royal Mint, amid wider market uncertainties. Issue date: Tuesday April 4, 2023. PA Photo. The Mint saw a 26% annual jump in the volume of gold investments made last year, with younger adults driving the uplift. See PA story MONEY Gold. Photo credit should read: Royal Mint/PA Wire NOTE TO EDITORS: This handout photo may only be used in for editorial reporting purposes for the contemporaneous illustration of events, things or the people in the image or facts mentioned in the caption. Reuse of the picture may require further permission from the copyright holder.
Mint saw a 26% annual jump in the volume of gold investments made last year Credit: Royal Mint/PA

One of the great oddities of investing is that rising asset prices prompt greater demand among investors. Take gold, for instance. 

Its price has surged 20pc higher over the past five months so that it is now within a whisker of its all-time high. Many investors, therefore, are now suddenly becoming rather excited about its prospects and are considering adding either physical gold or a gold exchange-traded commodity (ETC) to their portfolio.

While higher prices in almost every other walk of life equate to lower demand, investors seem to extrapolate recent trends and assume they will continue in perpetuity. In reality, though, trends never last. And buying at a higher price means less scope for capital gains due to a narrower margin of safety.

Indeed, the catalysts for gold’s rise could abate over the coming months. Weak economic growth prospects that have contributed to gold’s recent popularity owing to its defensive attributes are very unlikely to become the status quo. As history shows, economic downturns are followed by periods of growth as mean reversion eventually takes hold.

High inflation has already started to moderate in the United States, while in Britain the recent spike in inflation to 10.4pc is likely to prove an aberration. 

Although the Bank of England’s forecasts have been somewhat hit-and-miss in the recent past, it seems extremely likely that inflation will fall significantly this year. This could neutralise gold’s appeal as a store of wealth during periods of rapid price rises and put a dent in demand for the precious metal.

Clearly, a slowing pace of interest rate rises and an eventual end to the Federal Reserve’s hawkish monetary policy is likely to benefit gold. After all, reduced competition from interest-bearing assets such as bonds could make gold seem more appealing to investors. But purchasing the precious metal at, or close to, a record high seems to be akin to arriving too late to the party.

Of course, gold has proved to be an excellent holding within this column’s wealth preserver portfolio. It has generated a return of 24pc since being added in April 2021.

Now, though, its prospective returns are likely to be more limited as a result of its elevated price.

Although existing holders may wish to retain the precious metal in their portfolio, Questor believes that the return potential of the stock market significantly exceeds that of gold over the long run.

Just as a slowing pace of interest rate rises should aid the price of gold, equities are likely to be buoyed by the pursuit of less hawkish monetary policies. An end to interest rate rises, and even their potential fall over the coming years, is likely to have a positive impact on the economy’s prospects and company performance. Rising corporate profitability could lead to a widespread increase in share prices as investors become more upbeat about earnings growth potential.

When combined with falling inflation, which is expected to ease the cost of living crisis, the prospects for many businesses could materially improve over the medium term.

This is likely to further buoy investor sentiment towards stocks – many of which currently trade on exceptionally low ratings – and push market valuations higher. And as peculiar as it may sound to non-investors, higher share prices are likely to set in motion a snowball effect as they prompt greater demand among investors.

Undoubtedly, none of this will be a smooth process. The stock market has never offered a worry-free path to high returns, with volatility being the price that investors must be willing to pay in return for stunning capital gains. 

However, in Questor’s view, the stock market offers the best opportunity to generate inflation-beating returns over the long run due to an evolving outlook for inflation, interest rates and the economy’s prospects that is likely to lead to an increasingly “risk-on” investment environment.

Therefore, rather than following the investment herd in chasing the price of gold ever higher from its near-record level, investors seeking to generate a positive real-terms return from their portfolio are likely to be better off in shares. 

Although gold will remain a holding within our wealth preserver portfolio for now because of its long record as a store of wealth, we expect our equity holdings to be the main driver of returns in future.


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