Gold Hedging Effects

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We know that Gold has always been a wealth preservation tool for centuries because it tends to act as a hedging instrument specially in developed economies, the importance of gold as a hedging instrument was best established during the economic recession during the year 2009 even though the stock market plunged gold prices still managed to surge.
Our study wants to extend the effect of gold as hedging instruments in a developing economy like that of India.

Since the beginning of this decade Gold price has increased more than 500% of its price in the year 2000. Another striking feature of Gold is the fact that during the recession period of 2007-10 the price of Gold had increased by around 70%, we should remember that during this period unemployment …show more content…

Gold also seems to be acting as a strong Hedging instrument against extreme negative shocks but that is the case only in the short run and the effect ceases to exist in the long run. However when it comes to developing economies Gold seems to be having a weaker hedging effect that can be attributed to the fact that people who suffer losses after investing in emerging markets generally tend to withdraw their money and invest in the developed countries rather than trying to re adjust their portfolio. This in turn suggests that it is in the nature of the investors to not only worry about their own absolute performance but also their performance relative to other investors (Calvo and Mendoza …show more content…

The reason why Gold acts as a hedge against dollar is because Gold cannot and is not produced by authorities who produce currencies. This implies that people who can increase or decrease the supply of a currency from time to time to debase its value cannot carry out similar actions to debase the value of Gold. However it is also important to note that the extent to which gold served as a hedging instrument has differed from time to time for various reasons such as the private sectors attitudes towards gold might have been affected by the problems in gold producing countries and they opted against using it as a hedging instrument, also there might have been a firm expectation that the exchange rate fluctuation was temporary and thus people opted against rearranging their portfolios. Gold has served as a hedge against fluctuation in the foreign exchange value of the dollar, but it has not done so to a degree that seems highly dependent on somewhat unpredictable political attitudes and events (Forrest Capie and Terence C.Mills

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