Gold is an asset that individuals, institutions and governments have long considered a safe asset and a store of value, especially in times of difficulty. It has been widely believed that the utility of gold, as an investment asset, serves as a hedge during periods of uncertainty or extreme market conditions. Many investors believe that gold can be an excellent hedge against inflation because it maintains its value while currencies decrease in value. However, based on my research, stocks have proven to be a better protection against inflation in the long term.
In short, gold is a store of value and, in general, it is a good hedge against inflation and economic turmoil. While gold prices are largely speculative, their quantity is fixed and many investors turn to gold when market fears are high, which can help reduce downside risk in their portfolio. Gold is also often mistakenly considered a commodity, which by definition is a generic, largely unprocessed commodity that can be processed and resold. As you can see, gold prices were quite volatile during these periods, but both periods ended higher.
That said, given the lack of correlation between gold and cryptocurrencies, the latter can add some diversification benefits to a portfolio. From these two periods onward, the S%26P 500 and gold prices have a negligible correlation and are slightly inversely correlated. So, if gold had been in your portfolio as a hedge during the Great Recession, it would have helped offset stock market losses. As the chart shows, the S%26P 500 and gold prices in general acted in the opposite way, since both would be expected to react when the market retreated and more investors bought gold.
As you can see, an allocation of 5% or 10% to gold in an investment portfolio before these stock market crashes would generally have worked well as a hedge to offset losses, especially in the Great Recession. It's interesting to see how gold prices fell by 9% on the same day the market fell by 32% (March 20). Since all global central banks set short-term interest rates close to zero, the dollar is likely to remain within a limited range, eliminating a potential obstacle for gold. While these funds require management fees, buying publicly traded gold funds offers high liquidity and relatively low-cost exposure to gold.
On the other hand, a well-managed gold mining company can continue to increase profits and outperform other gold mining competitors, even when gold prices fall.