Why is Hedging with Gold Popular?
Overview: Gold is a promising asset in the Indian market. Here, we learn why hedging gold remains popular in India, making it a protective and fruitful investment against all odds.
India has been called the Golden Bird by many historians and philosophers, so the linkage of gold with this country’s culture has been deeply rooted since time immemorial. Any special occasion, such as a wedding or a celebration of a newborn, is marked by the exchange of gifts. Gold is considered the best choice to shower blessings and convey deep love towards family and friends. No wonder India is the largest importer of gold; the craze for gold here is like nowhere else.
The main aim of hedging is to invest in an asset that can guard the finances and investments against losses if a sudden, unexpected situation occurs. If an investor is bullish about the market and has invested by choosing a buy position in stocks, but a sudden change of global events pulls the market down, they have to bear losses. But here, if a hedge with gold is made for the investments, the investor can limit their loss to a great extent, although it is still hard to expect a total elimination of losses.
Gold v/s Stock market
To learn why most people opt to hedge stock portfolios by investing in gold simultaneously, you must understand how these markets work.
Mostly, when the stocks are touching new peaks, and the stock index is breaking new highs, the commodity market with assets, such as gold and silver, tends to remain an under player. It sees consolidation or a neutral stance in terms of movement. On the other hand, when the world is going through a confused state or a downward spiral, gold is the one asset that always seems to keep things strong for an investor.
When you see the gold v/s stock market, they share an inverse relation at most times. These markets tend to move in opposite directions in times of global turmoil and economic uncertainty. The recent tension between Russia and Ukraine and other war-like situations have been proof of how reactions of the stock and commodity markets tend to flow in opposite directions in the face of economic volatility.
Guard against inflation
One of the most fundamental concerns while investing is that it should give higher returns than the inflation rates to be called a truly protective and fruitful investment. In the case of stocks, this can get a little challenging to achieve. Undoubtedly, when the economy is going strong, stocks can reap excellent returns, but the case can go for a toss in a period of economic dilemma.
Gold is an asset that shows promising returns, with a strong track record. Of course, gold as an investment asset is not free from volatility. Still, it tends to give promising returns over the long term and thus acts as a popular hedge asset for investors against inflation.
Even when the interest rates are down, the one commodity that tends to hold strong and shine brightly is gold. So, there is no surprise that faith in gold as a haven asset has remained unshakeable over the years and will continue to remain so.