Gold is the safest money, investors should be overweight in times of war and devaluation - Ray Dalio

NEW YORK (October 31) Gold is better understood as fundamental money rather than a speculative asset, and investors would be wise to hold between 5%-15% of their portfolio in it - and even more in times of war or fiat devaluation, according to Ray Dalio, Founder of Bridgewater Associates.

“It seems to me indisputably true that gold is a money and it is the money that is least at risk of being devalued and/or confiscated,” he said in a Thursday LinkedIn post. “Here’s why I believe that’s true.”

Dalio said that throughout history, all money has either been “‘linked/hard-asset-backed’ currencies, meaning linked to gold or linked to something similarly limited in supply and globally valued, like silver,” or fiat currencies, “meaning currencies that are not linked/backed by anything, so they aren’t limited in supply.”

He noted that throughout history, every time gold-linked or asset-backed money had too much debt or commitments attached to it, the monetary system broke down. “This happened because the countries’ leaders either a) stuck to the commitment to back the money with gold, which led to debt defaults and deflationary depressions or b) broke their commitment to give the gold at the committed price, which allowed them to create a lot of money and credit, which typically devalued the money and led to higher inflation and higher gold prices.”

“Before the introduction of central banks (in 1913 in the US), the a) deflationary path was typically followed, but after central banks came into existence, the b) inflationary path was followed,” Dalio said. “In both cases, big debt/monetary breakdowns/crises followed and reduced debts relative to the incomes to service them, which fixed things at new, higher price levels.”

Since all currency has been fiat since 1971, Dalio said the lessons of fiat system breakdowns are more relevant to today. “In such cases, central bankers always created a lot of money and credit, which typically led to higher inflation and higher gold prices,” he said. “In all these cases, gold did well as an alternative money to ‘paper debt money.’ Over long periods of time, it was the money with the best track record of holding its purchasing power. This is why it is now the second-largest reserve currency held by central banks.”

One of the major advantages that gold has over fiat currencies is that “it has lower confiscation risks than other monies and other assets,” Dalio said. “That’s because it doesn’t depend on getting money from someone, and it’s tougher for someone or some government to take it from you. It is the toughest money to grab because it can be held in one’s own secure possession, unlike all other monies that require others to make payments of money to give them value. It can’t be stolen in cyberattacks. For this reason, gold has been the favored asset when there were big risks of money confiscations due to a) financial crises that led to very high taxes and other confiscatory policies and/or b) economic and monetary wars between countries (e.g., sanctions).”

Because of this, “during times when there were monetary/debt crises and/or wars that increased the risks of confiscation, gold went up a lot in value (or, said more accurately, it was the money that didn’t fall in value),” he noted. “This is why gold has continued to be the most fundamental money over time, with the best track record of having its value keep pace with the cost of living over very long periods of time.”

“That’s how the debt/money/gold dynamic has worked and still works, which is especially noteworthy at times when there is a lot of debt relative to the amount of money needed to service the debt and when there are risks of confiscation,” he added.

Dalio also shares his analysis of gold as a standalone investment asset.

“I look at gold like I look at all other assets in putting together my portfolio, which is by looking at its expected returns, risks, correlations, and liquidity in relation to other assets to make a strategic asset allocation mix,” he wrote. “Then I think about what tactical deviations I want to make from that mix based on what’s happening as it affects the markets. So, I see gold as part of one’s portfolio as having a certain amount of money that has certain characteristics, just like having a certain amount of cash has its characteristics.”

Dalio said his approach differs greatly from that of most investors, who treat gold more as a speculative market. 

“When I think about how much gold one should have in their portfolio, I view that as first and most importantly a strategic asset allocation rather than a tactical/market-timing decision,” he said. “I think everyone’s starting point for investing should be to know and be in the portfolio that is best to have, independent of any tactical views of the markets. Any deviations from that portfolio should only take place if the investor believes that they have better abilities to market-time, which investments are better than others. Most investors don’t have this ability, so they should just stick with their strategic asset allocation mix.”

“For this reason, when investors ask me if they should buy or sell gold based on whether I think it will go up or down, I tell them that that’s a tactical, secondary question because they should first start by asking themselves what amount of gold they should have in their strategic asset allocation,” Dalio added. “When I look at this in my own analysis, this is between 5% and 15% depending on what other assets are in the portfolio and the investor’s risk preferences.”

“As for tactically market-timing over- and underweighting gold in one’s portfolio, as explained, it should be overweighted at times of monetary system breakdowns and high risks of money confiscations and economic/monetary wars (e.g., sanctions) and underweighted at other times because, over long time frames, gold has been a relatively poorly performing asset (like cash) because it’s not a productive asset,” he concluded. “In any case, what I’m trying to get across is that you should think of gold as being a fundamental money that you should own at least some of. Most investors don’t own any.”

KitcoNews