Hedging vs. Speculation

Gold as a Wise Investment

Gold has been revered for thousands of years for its worth and rich history. Unlike paper currency, coins, and other assets, gold has maintained its worth over time. Its purchasing power, intrinsic value, and global demand are just a few of the reasons why it's widely regarded as a wise investment.

Hedging and Speculation in Gold Investments

Hedging entails taking offsetting positions in order to lessen the volatility or risk associated with a security's price movement, whereas speculation entails attempting to profit from a security's price change (Sargeant, 2006). Hedgers are risk averse, but speculators are risk seekers. While hedgers are willing to incur the opportunity cost of reduced risk, speculators are willing to take on the risk for a larger return. A hedger will buy gold because it tends to be uncorrelated with other assets. This means the price doesn’t go up and down when other asset classes do. For this reason, a hedger will consider investing in gold as part of a well diversified portfolio.

A speculator, on the other hand, will buy gold because he/she wants to hold the metal for a short-term profit or sell the metal to buy it back when the price is lower (for profit again). The speculator’s goal is short-term profit, and he/she will examine external factors that affect the price of gold to decide whether to buy or sell for profit.

The Bible's Perspective on Hedging and Speculation

The Bible has a rather subtle approach to financial advice than is usually presumed. With regards to hedging, the Bible considers the wise to be humble in their presumption about the future. "Yea, they are greedy dogs which can never have enough, and they are shepherds that cannot understand: they all look to their own way, every one for his gain, from his quarter" (Isaiah 56:11, King James Bible). While there are no easy answers, it’s quite clear that the Bible advocates for reaping where one has sown. As such, returns made from speculation are considered to be a result of superior knowledge and favorable circumstances rather than productive activity.

References

Sargeant, N. (2006, May 03). What is the difference between hedging and speculation? Retrieved June 19, 2017, from http://www.investopedia.com/ask/answers/06/hedgingversusspeculation.asp