Hedging Your Bets: Why Gold and Silver Are A Good Hedge

With the volatility in the current market and inflation on the rise, there are some advisors who may be suggesting investors unload a few stocks. Speculation right now is intense as the Chinese government focuses on regulation clamps on the tech industry. “The Hang Seng Tech Index’s selloff took its year-to-date declines to nearly 26%. It has pulled back after peaking in mid-February.” (Chinese Tech Stock Selloff Deepens)

The question becomes: do I hold on and wait for a rebound, or do I make some alternative investments to hedge possible continued losses? My personal philosophy in recent years has been traditional thinking: buy low and sell high. But what if this time is a little more sketchy? There are some investments that offer a balanced and relatively safer approach that I believe should be considered. A few years ago, friends of mine were advocating purchasing gold and silver as their concern was that the dollar may radically drop in value. At the time I remember thinking that is not very likely. Today, I’m slightly more nervous.

The ratio between real estate and gold for example, is a good measure of relative value between the two. It measures the amount of gold it takes to purchase real estate. The leading measure of US real estate prices is the Case-Shiller Home Price Index. The way it works is a base of Jan 2000=100 and multiplied by 1800 to approximate the average sales price of homes sold in the US. This historically tracked measure has recorded turning points in long-term trends in gold prices. Since there is no dollar component in the ratio, inflation concerns drop out of the calculation and what’s left are the two most popular valuable tangible assets relative to one another. See chart below.

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