Investment markets can be unpredictable, often influenced by external factors such as economic downturns, inflation, or geopolitical instability. During these times, investors often seek ways to safeguard their portfolios and protect against potential losses. One of the most reliable tools for mitigating risk is hedging, and including gold in your hedging strategy can be a great idea if you need hedging against inflation and turbulent times on the stock markets.
Gold’s reputation as a safe haven has made it an integral part of many investors’ strategies, especially when markets are volatile and/or inflation is high. In this article, we explore how hedging works and why gold is a popular asset for managing risk in investment portfolios.
Contents
The Purpose of Hedging
Hedging is a strategy used to offset potential losses by diversifying across different types of assets. The idea is to create a portfolio that includes a mix of assets that are not all affected by the same market forces or in the same direction. This helps to ensure that while some investments may suffer, others will hold their value or increase, reducing overall risk.
When applied correctly, hedging can provide a form of protection through risk reduction, particularly in times of market instability. For instance, if the stock market experiences a downturn, gold may perform better, helping to cushion losses.
How Gold Can Work as a Hedge
Gold has long been viewed as a reliable hedge against market risks. Its distinct characteristics make it a powerful tool for investors looking to protect their wealth during times of uncertainty.
Shielding Against Inflation
One of the most prominent uses of gold in hedging is to protect against inflation. As inflation rises, the value of traditional currency decreases, diminishing the purchasing power of savings and investments. Gold, on the other hand, tends to retain its value or even appreciate during inflationary periods, making it an effective tool to preserve wealth.
A Safe Haven in Crisis
Gold’s role as a safe haven asset is well established. During financial crises, political instability, or global economic slowdowns, investors flock to gold as a store of value. Gold’s global recognition and historical stability make it a preferred asset when confidence in other markets is low.
Diversifying Your Portfolio
Gold can be an effective mean of diversification in an investment portfolio. The price of gold often moves independently of stocks and bonds, making it a valuable tool for balancing risk. By adding gold to your portfolio, you reduce the correlation between your assets, which helps to stabilize returns over time and limit exposure to any single economic factor.
How to Integrate Gold Into Your Investment Strategy
There are several ways to include gold in your portfolio as part of a hedging strategy, depending on your risk tolerance and investment goals.
Physical Gold
One of the most traditional ways to invest in gold is by purchasing physical gold in the form of coins or bars. While owning physical gold provides direct exposure to the metal, it also comes with costs related to storage and insurance.
If you want the physical gold to be easy to sell, it is best to buy bullion coins or bars that come from a well-established and trusted producer and have the correct stamps and certificates. Many investors chose coins and bars issued by a government.
Examples of government-issued gold coins
- The American Liberty High Relief Gold Coin
This is a series of one-ounce gold coins which have been issued by the United States Mint since 2015. Each year features it own design on both the reverse and the obverse. The 2015 American Liberty High Relief Gold Coin have Liberty holding the United States flag on the obverse and a flying eagle on the reverse. - The Australian Gold Nugget
This is an Australian gold bullion coin minted by the Perth Mint. It has been minted since 1986 and come in many different weights, so it is important to check which Australian Gold Nugget you are buying. So far, the smallest is just 1/20 troy oz while the biggest one is a 1 tonne coin with a face value of 1 million AUD. - The Chinese Gold Panda
This is a series of gold bullion coins issued by the People´s Republic of China. The series was introduced in 1982, and the design is usually changed a bit from year to year. Chinese Gold Panda coins have been produced in many different sizes, from 1 gram and up. - The Spanish Gold Lynx
This is a gold bullion coin issued by the Kingdom of Spain. It was minted for the first time in 2021 and is a part of the Spanish doubloon-series, which (so far) also contains the Toro coin (2022) and the Caballo Cartujano coin (2023). - Swedish Memorial Coins
The Swedish Gold Memorial Coins are minted to commemorate different events in Swedish society, such as spot events and royal weddings, as well as to commemorate famous Swedes throughout history. The currency and collector value of these coins are often far above the price of the gold contained in them.
Gold ETFs
For investors seeking more convenience, gold exchange-traded funds (ETFs) provide an easy way to gain exposure to gold without physically holding the asset. These funds intend to track the price of gold and can be bought and sold like stocks, offering liquidity and lower transaction costs.
Examples of Gold ETFs
- SPDR Gold Shares
- iShares Gold Trust
- abrdn Physical Gold Shares ETF
- VanEck Merk Gold ETF
- Goldman Sachs Physical Gold ETF
- Deutsche Bank Ag London Gold Double Short Exchange Traded (Nts)
Gold Mining Stocks
An indirect method of getting exposure to the gold price is investing in gold mining stocks. By investing in companies that mine gold, investors can gain exposure to the gold market without directly owning the metal. However, mining stocks are subject to company-specific risks in addition to the fluctuations in gold prices, so they carry higher volatility. Geopolitical uncertainty or legal issues where the mine is located can for instance have a big impact on the share price, even when the gold market price remains the same.
Examples of public gold mining companies
- Newmont (TSX:NGT,NYSE:NEM) Newmont is a multi-national enterprise with significant operations in North America, South America, Africa, Asia, and Australia. In 2023, their total production of gold exceeded 172 tons.
The company has made several high-profile mergers and acquisitions in recent years, including purchasing Goldcorp in a 10 billion USD deal in 2019. In 2023, Newmont merged with Newcrest Mining to become the world´s largest gold-mining company.
The company Nevada Gold Mines is co-owned by Newmont and Barrick Gold (TSB:ABX, NYSE:GOLD), with Newmont currently owning 38.5% of the shares. In 2022, Nevada Gold Mines was the top-producing operation, with a gold output exceeding 94 tons.
- Barrick Gold (TSB:ABX, NYSE:GOLD)
Barrick Gold owns several high-yielding gold mines, including the Pueblo Viejo mine in the Dominican Republic and the Loulo-Gounkoto mine in Mali. In 2018, Barrick acquired Randgold Resources. As mentioned above, Barrick also owns Nevada Gold Mines together with Newmont.
- Agnico Eagle Mines (TSX:AEM,NYSE:AEM)
In 2023, Agnico Eagle Mines produced over 106 tons of gold. At the time of writing, the company has 11 operating mines in Australia, Canada, Mexico, and Finland. The Canadian Malartic mine in Québec and the Detour Lake mine in Ontario – two very high-yielding gold mines – are both fully owned by Agnico since early 2023.
In 2023, Agnico increased its own gold reserves by 10.5% to 53.8 million ounces of gold.
- Gold Fields (NYSE:GFI)
At the time of writing, Gold Fields have nine operating mines, spread out over different continents, countries and regions: Chile, Peru, Australia, West Africa, and South Africa. Recently, Gold Fields embarked on a project with AngloGold Ashanti, where they will combine their Ghana exploration holdings with the aim of establishing the largest gold mine in Africa.
In August 2024, Gold Fields announced that it will acquire Osisko Mining; a Canadian-based company that produced nearly 3 million ounces of gold in 2023.
Gold Futures and Options
For experienced investors, gold futures and options provide a leveraged way to trade gold. These financial instruments allow investors to speculate on future gold prices or hedge existing positions in their portfolios. However, they require a higher level of expertise and come with greater risks.
When Should I Hedge With Gold?
Gold is especially useful as a hedge when market conditions suggest that risks are rising. Key indicators that may prompt the inclusion of gold in your portfolio include:
- High inflation
When inflation rates increase, gold can help preserve the purchasing power of your assets.
- Geopolitical tensions
Events like wars, political instability, or natural disasters can lead to market uncertainty, making gold a safer bet. - Market volatility
In times of stock market declines or significant volatility, gold’s performance often stands apart from traditional equities, offering a stabilizing effect.
Even in times of relative economic stability, having a portion of your portfolio in gold can provide long-term security and peace of mind.
Final Thoughts
While gold can be a valuable hedge, it works best when used as part of a broader diversification strategy. Combining gold with other asset classes, such as bonds, equities, and commodities, can help ensure that your portfolio is well-balanced and resilient to different market conditions.
Gold provides stability, but other investments may offer growth potential. A balanced portfolio allows you to manage risk while still participating in market opportunities.
Gold remains one of the most effective ways to hedge your investments in times of market uncertainty. Its ability to protect against inflation, serve as a safe haven in crises, and diversify risk makes it an essential asset for many investors. By including gold in your portfolio, you can safeguard your wealth and reduce exposure to potential losses during volatile periods.
As the global economy continues to experience fluctuations, gold’s enduring value ensures its place as a cornerstone of investment strategies designed to protect and grow wealth. Whether through physical gold, ETFs, or other instruments, gold offers a way to keep your portfolio better protected in uncertain times.