Precious metals have an inverse relationship with stocks and currencies. They are usually unaffected by inflation, stocks and market downfalls. A value investor can benefit significantly by investing in the precious metals and mining sector. Gold is a commodity and a hard currency, and it moves inversely from fiat currencies.

If a value investor has other investments in stocks or cash, he or she can hedge against inflation by investing in metals. The investor can look to invest in gold or silver when there is uncertainty in the economy or during an economic crisis, to idly save money. If the U.S. Federal Reserve is tightening its interest rate policy, raising interest rates to try to fight against inflationary effects, gold can be a good hedge for the value investor. When the Fed tightens its policy, gold tends to rise. For example, if the investor is invested in a stock that has a 3% return and the inflation rate is at 7%, he or she is losing purchasing power; gold can curb these effects.

A value investor can also hedge against currency risk by investing in gold. In economic turmoil, where there is hyperinflation. gold historically proves to be a good value investment. Naturally, when currencies are experiencing weakness, demand increases and supply decreases in the precious metals sector due to investors trying to hedge against their other investments, driving prices of the sector higher. For example, if an investor had an investment in the U.S. dollar and believes that it may be weakening, he or she could hedge against inflation and currency risk with an investment in gold.

A value investor can improve his or her portfolio through investment in these commodities as well. If the investor can diversify his or her other investments by adding precious metals or mining stocks or exchange-traded funds (ETFs). he or she can improve the performance of his or her portfolio. Since there is an inverse relationship with gold and stocks, the investor would be hedged when the market is experiencing a correction or if there is a bear market. For example, if the market is experiencing a 15% correction, and the investor is invested heavily in stocks, he or she would benefit by investing in a gold ETF or stock due to the inverse relationship.

Precious metals – especially gold – also hedge against tail risk events. For example, if the investor was long on ProShares Ultra Euro (ULE), he or she can invest in gold to hedge against any unforeseeable event. For example, if a black swan occurs in the eurozone, the investor would be protected against a fall in the euro. If the investor was long ProShares Ultra Euro ETF when the Swiss unpegged the franc to the euro – an unforeseeable event – and also long SPDR Gold Shares (GLD), he or she would have been hedged against this tail risk event.