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Financial investments: Gold as an Investment Hedge
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What is an investment hedge?

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An investment hedge is any type of financial instrument that is purchased in order to offset market losses and the impact of inflation on disposable income.  It is a way to hedge against the inherent risks of investing in other vehicles such as bonds, stocks, and other investment options.


Why do people invest in gold?


Of all the precious metals that people invest in, nothing has been able to outperform gold consistently for centuries.  When you consider how volatile currencies have gotten during the last two years with the global economic downturn and the shrinking dollar in the US, you can understand why investing in gold is a protective and viable measure to exercise.  Gold has always been viewed as a reliable source of value when economic times deteriorate to the levels that they currently have.


Buying gold to counteract inflation


When you take into account all of the other precious metals, none of them can counteract inflation the way that gold can.  In the world of economics and finance, inflation is the method that the value of goods and services are effectively measured.  In terms of currency devaluation (fiat currencies and the shrinking dollar), gold offers a perennial value compared to other currencies or precious metals and therefore hedges against inflation.  Purchasing gold helps to safeguard your protection against inflation as well.


5 reasons to buy gold


Although the reasons for purchasing gold are numerous, the 5 primary reasons for purchasing gold include:


  • Every dollar invested in gold is preserved capital regardless of how severe an economic crisis gets
  • Gold is a safe, cash-ready reserve and provides you with a cash cushion
  • When hedging against inflation, gold’s purchasing power usually does not decrease
  • Whenever you are urgently in need of cash during an economic crisis, gold provides you with real money
  • You never run the risk of default with gold like you would with other investments


Gold is not only a hedge against inflation, fiat currencies, and the shrinking dollar, It is one of those precious metals that provide the consumer with a safe haven against economic, political, and social crises.


How to hedge against risk by purchasing gold


One of the important things that you want to know is what drives the price of gold up or down.  There are a number of reasons for a decrease or increase in the value of gold.  Unlike other investments or securities, gold’s value lies within the metal itself, not the companies or the countries that it is representative of.  So understanding the difference between investing in gold versus other securities is critical.


Gold can be purchased in a number of different forms and/or purchasing mechanisms including:


  • Bars or more commonly bullion
  • Certificates
  • Coins
  • Derivatives such as futures and options
  • ETF’s or Exchange Traded Funds
  • Gold purchasing accounts
  • Investing in companies that mine gold


Characteristically, there are 3 primary factors that have influenced the price of gold over recent centuries that include:


  • Bank failures
  • Economic, political, and social upheavals
  • Interest rates (both low and even negative)
  • Invasion, mass looting, and wars


On a closing note, despite the fact that stocks can offer some significant returns, they do not protect you against the negative factors above.  Typically, when the economy tanks, so does the stock market.


To Your Success,

Bob Clark




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