You’ve probably heard that gold is an investment hedge. Hedging is what you do when you cancel something out to do something else. For example, you might hedge against market fears by taking money out of stocks and investing them in gold. You can also hedge against inflation and hedge against long-term fears. Here’s a closer look at the top 3 reasons investors start hedge trade by putting their money into gold.
#1 Inflation
Anytime the topic of gold comes up, it’s only a matter of time before inflation follows. Gold is an ideal hedge against inflation. Where currency loses value over time, gold has a stellar track record of maintaining purchasing power over decades and even centuries. However, it’s important to look at how gold stays ahead of inflation. Gold prices can work within a relatively tight margin for years before rising considerably in a bull market, then sinking to a new base that’s considerably higher than its last.
#2 Market Crises
It’s a well-known rule of thumb that when markets hit troubled waters, investors seek out safe-haven investments. That can mean anything from bonds to commodities like gold bars. These are investments that typically have lower yields but less uncertainty. Stocks come with the risk of losing your initial capital. The trade-off in a good economy is that your gains will be lower than if you invested in stocks, but in a bad economy, they’re more likely to maintain their value or rise as investors crowd in.
During market crises, investors like to hold physical gold bars and coins. They use online dealers like Silver Gold Bull Canada because they’re convenient, secure ways to buy gold. Online dealers also charge lower premiums than brick and mortar stores that face higher overhead. It’s an effective way to buy gold and get the highest returns.
#3 Fear
Gold comes into its own when investors start trade based on fear, as evidenced by its performance both during the late 1970s and early 1980s and its sky-high prices in the aftermath of the 2008 financial crisis. In the late 1970s, investors were worried about the future of the United States. There were doubts about the United States’ leadership as well as its potential to meet its financial obligations. Debt levels were sky high and the city of New York was near bankruptcy. Gold, which had only recently been unpegged from the currency, became investors’ safe-haven of choice.
When several major American banks looked like they would fail in 2008, even after their coordinated bail-out there were concerns about financial institutions in the United States and in Europe, as banks in the U.S., U.K., Portugal, Iceland, and Spain folded and were acquired up until 2012.
Today, some are suggesting there’s a similar crisis of confidence in the U.S. as it turns on allies, NATO, and initiates aggressive tariffs. Meanwhile, the U.S. debt is set to grow by $1 trillion annually. This marks a return to the $1 trillion deficit, but the last time the country was deep in a recession. Gold investors should be thinking about whether or not a return to fear trading is on the horizon.
