We’ve all heard the term, “Hedge your bets” — according to the Merriam-Webster Dictionary, it is an idiom that means doing things “that will prevent great loss or failure if future events do not happen as one plans or hopes.”[1] That sounds a lot like buying insurance, wearing a seatbelt, or installing a security system.
Translated to the world of investing, the notion of a “hedge” is about protecting your money from market volatility, economic uncertainty and geopolitical risk. According to Yield Street, “Hedging strives to mitigate investment losses with strategic opposing investments … The idea is to buy into an asset with the potential to go up, in case another one goes down.”[2]
Gold has long been considered to be among the most reliable and effective financial hedges — here’s why.
Gold as a Market Hedge
The Wall Street temperament is an interesting phenomenon. Big board traders and investors tend to be energetic, competitive, and extremely driven. But they are also prone to panic. In a world driven by fear, greed and a history of crashes — the stock market can be subject to sharp, emotional price declines and herd behavior.
“When investors see others buying a particular stock, they often follow suit, fearing they’ll miss out on potential gains—a sentiment famously dubbed “FOMO” (Fear of Missing Out). Conversely, when panic strikes and everyone starts selling, individual investors often join the stampede, terrified of holding onto a sinking ship.”[3]
Since gold is considered a store of value and a safe haven, its price historically moves in the opposite direction of the more speculative stock market — so when equities are in freefall investors rush to gold. Gold prices have surged during market crashes and collapses like those in the 1970’s, during the subprime mortgage crisis in 2008, and more recently during the Coronavirus crash of 2020.
Gold as a Dollar hedge
Gold is widely considered to be negatively correlated to the U.S. dollar and the reason boils down to simple mathematics. Since gold is priced in dollars, when the buck loses value, it requires more dollars to purchase an ounce of gold — and this drives up prices.
According to The Royal Mint, the longstanding relationship of the yellow metal and the greenback moving in opposite directions relative to price and value, solidifies gold’s role as a dollar hedge:“Historically, gold and the US dollar have shared an inverse relationship. When the dollar strengthens, gold prices often decline, and vice versa. This dynamic is rooted in gold’s role as a safe-haven asset and a hedge against currency devaluation. Several factors contribute to the expectations surrounding the US dollar, including monetary policy, economic performance, and geopolitical stability.”
The dollar has lost more than 10% of its value since January, notching its worst start to a year in more than 5 decades. Rising government debt, on again/off-again trade wars, Fed policy uncertainty, and global challenges to the dollar’s reserve currency status have weighed heavily on the “buck” and pushed gold to record highs.
Gold as a Crisis Hedge
Back in the 1930s, amid a market collapse, banking instability, and a complete loss of confidence in the U.S. economy — Americans weren’t hoarding dollars.
“A slowing economy combined with the stock market crash of 1929 and a subsequent wave of bank failures in 1930 and 1931 led to crippling levels of deflation. Soon, the frightened public began hoarding gold.”[4]
The rush to gold was so frenzied that President Franklin D. Roosevelt, via Executive Order 6102, not only banned Americans from owning gold but required citizens to turn in all of their personal gold in exchange for paper dollars.
“All persons are hereby required to deliver on or before May 1, 1933, to a Federal Reserve Bank or a branch or agency thereof or to any member bank of the Federal Reserve System all gold coin, gold bullion and gold certificates now owned by them or coming into their ownership on or before April 28, 1933.”[5]While Depression Era gold hoarding and FDR’s subsequent confiscation were unprecedented, gold’s history as a crisis hedge is well established. From stagflation and inflation, housing bubbles and market crashes, recessions and pandemics — gold has been the hedge of choice for investors seeking a safe haven.
The Perfect Hedge?
So, is there such a thing as a perfect hedge? Not exactly. It’s rare for an asset or financial strategy to eliminate all risk simply by virtue of the fluidity of market conditions, fluctuating monetary policy, ever shifting political climates, and the inherent unpredictability of the global economy.According to Investopedia a “perfect hedge” is actually a calculation of risk tolerance and the understanding that removing all risk ultimately impacts rewards. But with gold currently up over 28% on the year, it has made its short list of potential “perfect hedges.”
“Assets considered a perfect hedge in volatile markets include liquid assets like cash and short-term notes and investments like gold and real estate. These perfect hedges do not experience the volatility of the financial market and illustrate other places in which an investor can shelter cash.”[6]
At the end of the day, risk is an inherent condition and no market or monetary correlation —positive, negative or otherwise — is without exception. So, the “perfect hedge” is really about minimizing uncertainty and playing it safe with your money. Gold’s track record for wealth protection, capital preservation, and financial peace of mind is clearly among the longest and most well-established in history.
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[1] https://www.merriam-webster.com/dictionary/hedge%20one%27s%20bets
[2] https://www.yieldstreet.com/resources/article/what-is-hedging-and-how-do-hedge-funds-work/
[3] https://thedecisionlab.com/insights/finance/the-sheep-in-the-stock-market
[4] https://www.history.com/articles/how-did-the-gold-standard-contribute-to-the-great-depression
[5] https://www.presidency.ucsb.edu/documents/executive-order-6102-forbidding-the-hoarding-gold-coin-gold-bullion-and-gold-certificates[6] https://www.investopedia.com/terms/p/perfecthedge.asp
