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Forget gold! I think a stock market crash could be a buying opportunity

Peter Stephens
Gold bullion on a chart

The risks facing the stock market may be mounting, but it could present a buying opportunity rather than a reason to flock to less risky assets such as gold. Certainly, the price of the precious metal may move higher in the short run. It’s proven popular among increasingly risk-averse investors during 2019, and this trend may continue in the coming months.

However, history shows buying stocks while they face an uncertain future could be a better idea. Indexes such as the FTSE 100 have always recovered from their lows, which could present opportunities for long-term investors.

Risky future

Investors appear to be anticipating a difficult future for the world economy and the stock market. The price of gold has moved around 15% higher in 2019, while the FTSE 100 now has a dividend yield of around 4.5%. This indicates that investors are feeling less bullish about shares than they were in the past, with gold’s defensive status appearing to be attractive at a time when the global economy faces numerous risks.

Those risks include geopolitical challenges in the US and China, as well as a trade war between the two largest economies in the world. There are also uncertainties both economically and politically in Europe, while a decade-long bull market suggests a bear market may not be too far away.

Those factors, as well as others, could provide the catalyst required for a stock market crash over the short run.

Buying opportunities

However, in many cases, the valuations of shares indicate a market crash may have been priced in. Many FTSE 100 shares, for example, trade on valuations significantly below their historic averages. Similarly, their dividend yields are high. This could present a buying opportunity for long-term investors.

Furthermore, if there’s a decline in the coming months, the appeal of shares could increase yet further. Various bear markets have come and gone in recent decades. In some cases, it’s felt as though the world economy would never recover. But, on every occasion, it has. So too have indexes such as the FTSE 100 and FTSE 250, with bear markets simply offering the chance to buy high-quality shares at low price levels.

Long-term horizon

Perhaps the major prerequisite for buying during bear markets is that an investor has a long time horizon. After all, it can take a number of years for the stock market to recover from its lowest levels. However, it’s done so throughout its history, and is likely to repeat this cycle in the coming years.

Investors who can look beyond short-term paper losses and focus on buying shares at attractive prices could post high returns in the long run. Assets such as gold may hold appeal in the short run, but are likely to be outpaced by the stock market over a longer time period.

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Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

Motley Fool UK 2019