Although you are probably thinking that the term sounds like your neighbor’s hobby who is absolutely in love with his garden, and his obsession to cut, trim and shape bushes, which are formed like different animals or shapes and sizes – investment hedging is an important element all investors should familiarize themselves with.
There is no doubt about the fact that your investment portfolio’s protection is just as – or even more important than its appreciation.
And just like your neighbor’s bizarre obsession with his garden, hedging is something that is often more talked about than being fundamentally explained, which seems as if it is the only exclusive cog in the big financial realm.
Well, even if you’ve just started investing, you can still understand what the term means and implies – the techniques involved in making it work and how several companies use it to protect their investments.
Gold as an Inflation Hedge
Gold can be used as an effective hedge against inflation. For example, if the dollar were to drop in value due to inflation, gold has a tendency to become more expensive or rise in value.
If an investor owns gold they would be protected (hedged) against the falling dollar.
This is because inflation rises and decreases the value of the dollar. This, in turn, will result in an increase in the price of gold. This results in the investor being compensated for the inflation by receiving more dollars for each ounce of gold owned.