John Jagerson

How GLD Can Protect Your Portfolio Against Inflation

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This article is brought to you by LearningMarkets.com.

Uncertainty in stocks can jump the gap into the other capital markets. Traders will often look for ways to diversify riskier bets in a falling or volatile equity market with bonds, which may drive yields down or in safe-haven commodities like gold.

As a diversification tool, gold is important not only as a way to hedge falling stocks but also as a potential protection against inflation. In these two respects, learning to invest in gold is a great way to add a powerful tool to your investing portfolio.  

In the past, investing in gold was difficult for individual investors. You could buy the actual spot commodity in the form of coins and bullion or you could speculate in the futures market. Both alternatives were unpopular and expensive for most individual traders. However, investors now have access to gold investments through ETFs like the SPDR Gold Trust (GLD).

GLD is one of the largest ETFs on the market in terms of asset value because the fund actually holds positions in gold bullion itself. As of this writing, the fund holds more than 34,000 ounces of gold bullion.

Because GLD is an ETF, you can trade it like a stock. This means that the minimum investment is a single share rather than a full ounce or multiple ounces. GLD even has options available for traders looking for additional leverage.

As an investment, gold is considered a hedge against inflation because it is inversely correlated to the value of the dollar. That means that if the U.S. dollar falls in value through inflation, gold prices will rise because it takes more, weaker dollars to buy an ounce.