When you’re new to precious metal trading, the difference between hedging and speculation can be confusing. However, it’s important to understand the difference so you can make decisions about gold and silver investments that make the most sense for your situation.
Another thing that is essential to understand is that investing in physical gold or silver doesn’t necessarily mean you have to keep these commodities at your home or office (although physical possession is certainly possible) thanks to alternatives such as allocation. Rather, it indicates that one or the other is part of your overall investment portfolio.
Gold and Silver Hedgers
Generally speaking, people who identify as hedgers are more conservative in their approach to investing. They buy shares of gold or silver because the prices for these commodities tend to remain stable or even rise when other types of investments decline or collapse. According to Investopedia, hedging means that the investor purchases gold or silver as a means to offset gains and losses from other assets.
The economic recession of 2008 is a prime example of when hedging was a wise choice. As the value of the dollar plummeted, the price of gold remained unaffected that year and rose to $1,800 per ounce in the recovery years that followed. The underlying goal is to break even and to reduce the risk of devastating investment losses. People who hedge in gold view it more as a long-term strategy to safeguard their other investments rather than to earn a high return on investment.
Investment Speculators
People who fall into this category are at the other end of the spectrum completely. They buy gold when they see that its price is steadily increasing while making predictions on future market performance. Gold and silver speculators hold onto the product until they feel that the price for it has reached a peak. They then sell it to make a profit. Speculation is a risky venture, but those who engage in it are more comfortable with the practice than those who prefer to hedge gold or silver. Day traders tend to make up a large percentage of the people willing to speculate on these commodities.
Consider Your Personality before Selecting an Investment Method
There is no right or wrong answer when it comes to precious metal trading. You need to define your own goals and make an honest assessment about how comfortable you are with risk. You may want to consider seeking advice from a professional who has several years of experience with gold and silver investments. Keep in mind that you can always change your approach if you find that one of them doesn’t bring the results you hoped to achieve.