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Of all the precious metals, gold has maintained its popularity as an investment. Perhaps this is due to its long history as the first form of money. Societies and economies have placed value on gold throughout the centuries, preserving its worth.

What makes Gold special?

Gold was used as the base for the gold standard which set the value for all money. It’s regarded as a source of money that will always have value.

Also, gold is different because its value has little to no correlation with other assets. For instance, stocks have an inverse relationship with bonds but gold prices don’t rise or fall when most asset classes do.

Investors use gold to diversify their portfolios and hedge risk, but what is it about gold that makes it a popular choice for hedging?

#1. It maintains value when major currencies erode

Gold is a good hedge against the decline of a currency, typically the US dollar. Although the US dollar is one of the most important reserve currencies in the world, its value sometimes falls as it did between 1998 and 2008.

Typically, when the value of the dollar declines or there is a financial crisis, the value of gold rises. For instance, the value of gold nearly tripled between 1998 and 2008. Gold is therefore used as a hedging tool when the economy negatively affects major currencies.

#2. It’s resilient in the face of inflation

The stock market tends to plunge as the cost of living rises and inflation increases. You need an asset to help you balance this out and this is where gold comes in.

The price of gold tends to increase as the cost of living increases. This is because when a currency loses its purchasing power to inflation, people tend to hold money in the form of gold and this increases its value. As such, gold has always been an excellent hedge against inflation.

#3. It’s a good defence against deflation

Gold has also been used as a hedge against deflation – the flip side of inflation. Deflation occurs when the economy is in a downturn, business activity slows, excessive debt looms and prices drop.

When this happens, people hoard cash and the safest way to hold cash is in gold. As more people compete for gold, its supply decreases and this increases its purchasing power.

#4. It’s good in times of geopolitical uncertainty

Gold not only retains its value during times of financial uncertainty but in times of geopolitical uncertainty as well. Gold has often been called the “crisis commodity” – people rush to it when world tensions rise. For example, its price tends to increase when confidence in governments is low as highlighted by the recent increase in gold price amidst Brexit uncertainty.

This is because people trust in the safety of gold. Crises such as wars, which have a negative impact on the prices of most asset classes, tend to impact gold positively as increased demand for the metal pushes up its value. This means gains in gold can help you offset the losses in the other asset classes.

Hedging with Gold

Although gold goes through times of volatility, it has always maintained its value over the long-term. Gold is great for hedging because its value increases in response to events that cause the decline of paper investments like bonds and stocks. Including gold in a diversified investment portfolio helps maintain the value of the portfolio.

DISCLAIMER: This material on this website is intended for illustrative purposes and general information only. It does not constitute financial advice nor does it take into account your investment objectives, financial situation or particular needs. Commission, interest, platform fees, dividends, variation margin and other fees and charges may apply to financial products or services available from FP Markets. The information in this website has been prepared without taking into account your personal objectives, financial situation or needs. You should consider the information in light of your objectives, financial situation and needs before making any decision about whether to acquire or dispose of any financial product. Contracts for Difference (CFDs) are derivatives and can be risky; losses can exceed your initial payment and you must be able to meet all margin calls as soon as they are made. When trading CFDs you do not own or have any rights to the CFDs underlying assets.

FP Markets recommends that you seek independent advice from an appropriately qualified person before deciding to invest in or dispose of a derivative. A Product Disclosure Statement for each of the financial products available from FP Markets can be obtained either from this website or on request from our offices and should be considered before entering into transactions with us. First Prudential Markets Pty Ltd (ABN 16 112 600 281, AFS Licence No. 286354). FP Markets does not accept applications from U.S, Japan or New Zealand residents or residents from any other country or jurisdiction where such distribution or use would be contrary to those local laws or regulations.

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Michael Morton

Michael Morton

Michael has worked within the Financial Industry for more than 20 years. Starting out as a financial analyst, he has extensive experience working with fund management groups and brokerages.

With an interest in Stocks and Shares, Funds, ETFs and Commodities, his investment focus is medium to long term gains, with the objective of financial security on retirement, and building wealth for his young children for their adult life. His broker of choice is Hargreaves Lansdown.

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