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Why use gold investments as a hedge?

Gold is looked at as a hedge investment in many different situations. The first and most popular use of gold as a source of protection is as a hedge against the decline of a currency, typically the US dollar. When the dollar slips, the yellow metal not only becomes less expensive to hold, but also tends to rise in value.

“Gold’s relationship with the dollar is determined by US-based gold supply and demand, as well as by the status of the dollar as the reserve currency globally,” states the World Gold Council. “Historically, a weak dollar tends to provide a stronger boost to gold’s performance than the drag created by a strong dollar.”

By holding the precious metal as a diversification tool when the economy negatively affects currencies, investors can incur gains from the metal’s increased value.

The second reason why gold makes a good hedge is that it can act as a defense against inflation. When the cost of living begins to rise, the stock market often falls. In those cases, investors with assets that are negatively affected by a volatile market need something to balance that out — that’s where gold comes in.

Over the past 50 years, investors have seen gold make huge gains when the stock market is crumbling. As Investopedia points out, “This is because, when fiat currency loses its purchasing power to inflation, gold tends to be priced in those currency units and thus tends to arise along with everything else.”

Interestingly, the yellow metal has also been used as a hedge against deflation, which happens when prices drop, the economy is in a downturn and excessive debt looms. This situation has not occurred since the Great Depression of the 1930s, and to a much smaller degree after the 2008 financial crisis.

Market participants may decide to hoard cash in this type of scenario, and the safest place to hold cash is in gold. Again, while this situation is not commonplace, many investors keep the yellow metal in their portfolios on the off chance that another massive period of deflation will take place.

Finally, gold can be used as a general portfolio hedge when market participants hold investments that are not related to one another. Since the precious metal generally has a negative correlation to stocks, bonds and other financial instruments, investors often diversify by creating a portfolio that combines gold with stocks and bonds in order to reduce both volatility and risk.

While it is true that the yellow metal goes through times of volatility, it has always maintained its value over the long term, making it a steady addition to investors’ portfolios.

Those who have decided to add gold to their portfolio as a hedge have a variety of options. Here’s an overview of three of the most popular ways of getting exposure to gold.

1. How to use physical gold as a hedge

Investors can get the most direct exposure…