InvestorQ : How is it that gold helps me to hedge my risks of the portfolio? Will it not reduce the returns of my portfolio?
Dilmini Mercia made post

How is it that gold helps me to hedge my risks of the portfolio? Will it not reduce the returns of my portfolio?

Answer
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Dhwani Mehta answered.
1 year ago


The importance of gold arises from the fact that gold prices normally tend to have a low correlation to the movement of debt and equity. Equity and debt normally tend to form a curious pattern. In normal times, equity and bond prices tend to diverge while in times of economic crisis both the price of equity and debt crashes. Gold has a low correlation to equity and bond prices and hence including gold in your portfolio gives you a natural hedge. Even a 10% exposure to gold in your portfolio will give a natural hedge due to gold’s low correlation with other asset classes. Remember that gold does not compete with equity and debt as investment alternatives. On the contrary, it is meant to give stability to your portfolio when equity and debt are performing badly. A hedge is a protection in bad times and that is exactly what gold does to your portfolio.