A hedge in finance, is an investment that is taken out to reduce or cancel out the risk in another investment. It is used to protect against potential losses in the future.
It's a bit like taking out insurance to limit or offset the possibility of adverse price movements in an asset or investment portfolio.
When you hedge, it means that you are taking an opposite or counterbalancing position in a related asset or market.
Hedging against inflation
When people talk about hedging against inflation, they mean investing in assets that are likely to maintain, or increase in value, when inflation rises. (the purchasing power of money decreases).
Inflation reduces the value of cash over time, so assets that grow in value or can generate income can act as a buffer.
Common hedges against inflation include:
- Property: Property values and rents often rise with inflation.
- Commodities: Oil, agricultural products, raw materials all tend to rise in price when inflation is high.
- Precious Metals like Gold and Silver: Seen as a store of value and often increase during inflation.
Hedging your investments
Using Gold and Silver Bullion to hedge against stock market movements is also a popular strategy which many small and high-net-worth investors use to protect their wealth during times of market volatility or economic uncertainty.
These precious metals are considered "safe-haven" assets because they tend to hold or increase their value when other assets like stocks lose value.
Inversely correlated with stocks
Gold and silver often have an inverse relationship with the stock market. When stocks decline, investors tend to flock to safer assets, pushing up the price of precious metals. This inverse correlation can make them a useful tool to balance a portfolio during market downturns.
Third Party Risk
Gold and silver bullion are physical assets that you can hold in your hand. They don't rely on a third party's financial health or performance. This absense of third-party risk makes them particularly valuable in times of economic uncertainty, or financial stress.
Diversification
Precious metals provide an excellent means of diversification. A well-diversified portfolio spreads risk across different asset classes, reducing exposure to any single investment's poor performance. Since gold and silver typically behave differently from stocks, they help to reduce your overall portfolio volatility.
Liquidity
Gold and silver are extremely liquid assets. Unlike property, which can take months or years to sell, precious metals can be easily bought or sold, providing investors with quick access to cash when needed. This liquidity is particularly useful during times of financial crisis, when selling stocks or property may result in as significant loss.
Balancing your portfolio
While gold and silver are a great way to hedge against inflation and market volatility, financial advisors usually recommend holding about 5-10% of your entire portfolio in precious metals like gold and silver.
This amount is enough to provide a hedge without overly concentrating your investments in a single area.
If you're considering investing in gold and silver, it's essential to do your research and understand the risks involved. While they can be a valuable addition to your portfolio, they can also be volatile and subject to price fluctuations. We are not financial advisors, so please consult with a professional before making any investment decisions.
If you're interested in buying gold and silver bullion, check out our buy bullion page to see what's in stock today.
