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Should I buy physical gold over FTSE 100 shares?

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Young Black man sat in front of laptop while wearing headphones

FTSE 100 shares have held up relatively well so far this year. The index is down 5.8% year to date as I write. This isn’t a major drop but concerns over fast-rising interest rates, inflation, and political uncertainty could hint at more trouble to come.

Several FTSE 100 shares in my portfolio have performed well over the last few years. So, is it time to quit while I’m ahead and seek alternative investment in the form of gold?

Inflation

Famously, gold has performed well during periods of high inflation. It is often referred to as an inflation hedge, meaning it offers investors protection from the decreasing purchasing power of money. But why is this?

Inflation means higher prices, and higher prices mean my cash won’t stretch as far as it used to.

Assuming the demand for gold remains level, in the face of inflation, 1 unit of gold becomes worth more in the terms of a currency like the pound. This is because the pound becomes weaker and will buy less gold for the same amount of money on the open market.

From 1978-1980, inflation rose sharply from 8.2% to almost 18%. In that period, the price of gold rose approximately 200%.

Safe haven

Gold is transportable, durable, universally desirable, and quite easy to authenticate. Therefore, it is very successful as a store of value. It is often perceived as a wholly “real” asset, unlike a banknote with little intrinsic value.

We saw the gold price jump when Russia effectively declared war on Ukraine earlier this year. Investors naturally have concerns over the likely ripple effects of such events. This is when investors tend to favour high-quality assets that are cushioned by persistent global demand.

Interest rates

As I write, the price of gold is down 12.7% year to date. In this time, interest rates in the UK have risen.

Rising interest rates can cause problems for the price of gold. As interest rates rise, currency strength usually begins to increase. This is because debt becomes more expensive making loans less affordable. This tightens the money supply.

This has placed significant downward pressure on the price of gold since interest rates are rising in many countries around the world.

Conclusion

I expect that interest rates will continue to rise as we emerge from a period in which cheap borrowing was taken for granted.

I also expect that government will not be able to cap energy prices indefinitely and that inflation and uncertainty will outweigh rising interest rates in determining the price of gold.

However, despite the challenges FTSE 100 shares will face with rising costs and falling consumer demand, I will not be swapping any of my positions for gold. I believe my stock picks are well positioned to weather the uncertain climate. I’m also much keener to ride out economic cycles than increase my exposure to more volatile assets like gold.

Any further additions to my Stocks and Shares ISA will be picked carefully. I will focus on stocks with good cash flow, reasonable debt, and product demand exhibited by the underlying business.

The post Should I buy physical gold over FTSE 100 shares? appeared first on The Motley Fool UK.

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