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Discuss the following question: Commercials suggesting that “buying gold” would be a wise decision are commonly...

Discuss the following question: Commercials suggesting that “buying gold” would be a wise decision are commonly aired. Explain the difference between “hedging” and “speculating” by explaining why someone who wishes to “hedge” against inflation might choose to purchase gold. Explain why someone who wishes to “speculate” might also choose to purchase gold. Relate the motivations of “hedging” and “speculating” to the topic of Christianity. You must submit 1 thread of at least 250 words and cite at least 1 source in addition to any Scripture verses cited.

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Expert Solution

Hello,

Hedging and Speculation are two important purposes of investors/people in financial markets. Hedging is risk management strategy followed by those who already have some exposure in September underlying and therefore wishes to hedge against that exposure. For instance, an US firm may have exported goods to UK and therefore has pound receivable in next 3 months. So US firm has exposure to pound. It is afraid of pound weakening against USD in future. If it so happens then it will end up receiving lesser amount of USD in exchange of GBP. So this form would like to hedge its currency exposure via selling currency forward or futures. While a speculator does not have any exposure to any underlying but he wilfully create the exposure to exploit his price belief. For instance, a person considers that stock of Microsoft Inc will go up by 6% in next one month or so. So he will create a long position on stock of Microsoft to enjoy the upside potential say buy that stock or stock futures etc. This starting is risky as his price belief may turn out to be other way in future and he may lose. So speculators claim to have superior valuation skills and come up with their own forecasts.

Coming to our example on gold. Gold is considered to be the natural hedge against inflation. In fact all the commodities like corn, gold, Silver, energy etc are hedge against inflation. It is so as their prices are determined by sand and supply forces. Hence any inflation is automatically captured in their prices. So any person who fear of rising inflation may buy gold as gold prices at minimum rise by inflation. Further during the times of recession, gold is considered to be safe haven and reaps good returns as compared to equity and bonds.

As discussed above, speculator may buy gold if he thinks that gold prices will rise in future say he has thoroughly analysed gold markets across the globe and concludes that there is shortage of gold or people are shifting their corpus from equity/bond etc to gold due to recessionary signals in future, so prices of the gold are poised to increase and he should buy gold futures.


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