Author: Ray Dalio, Founder of Bridgewater Associates
Translated by: Felix, PANews
Recently, the price of gold has surged, with the spot price of London gold reaching a high of $4,380.79 per ounce during trading, accumulating over a 60% increase since the beginning of the year. In response, Ray Dalio, the founder of Bridgewater Associates, recently posted on the X platform to share his views on gold. Below is the full content.
Thank you all for the wonderful questions about gold. I will do my best to answer them and share my responses in this article.
1. Your views on gold and its price seem to differ from most people. How do you see gold?
You are correct. I believe most people make a mistake by treating gold as a metal rather than the most mature form of currency, viewing fiat currency as money rather than debt, and thinking that the creation of fiat currency is to prevent debt defaults. This is because most people have never experienced the era when gold was the most fundamental currency (the gold standard) and have not studied the debt-gold-currency cycles that have occurred in almost all countries throughout history. However, anyone who has witnessed the evolution of gold-currency and debt-currency over time would have a different perspective.
In other words, to me, gold is like cash—it is money. Over the long term, its real return rate is about 1.2%, which is roughly the same as cash—because it does not produce anything; and gold also has purchasing power, which can be used to create lending funds and help people build profitable businesses through stock holdings. If those stocks are solid and can generate the cash needed to repay loans, then of course stocks are better. But when they cannot repay loans, and the government prints money to avoid default issues, non-fiat currency (gold) becomes more valued. So, in my view, gold is like cash; it is money, but it cannot be printed and devalued like cash. When stock market bubbles burst and/or countries no longer recognize each other's credit, such as during wartime, gold is a good diversification tool away from stocks and bonds.
In my opinion, gold is the most reliable fundamental investment, rather than just a metal. Gold is money, like cash and short-term credit, but unlike cash and short-term credit that generate debt, it can settle transactions—that is, it can pay expenses without incurring debt and can also repay debt.
In summary, for some time now, I believe the relative supply and demand relationship between fiat currency and gold currency has been changing, with the value of fiat currency declining relative to the value of gold currency. As for the fair price of debt currency relative to gold currency, considering their respective supply-demand ratios and the potential scale of bubble bursts, I am clear that I should retain a portion of gold in my portfolio. I think investors who are torn between holding no gold and holding a small amount of gold are making a strategic mistake.
2. Why gold? Why not silver, platinum, or other commodities, or as you suggest, hold inflation-protected bonds?
While other metals can also serve well as inflation hedges, gold occupies a unique position in the asset portfolios of investors and central banks because it is the most universally accepted form of non-fiat currency for trading and wealth storage, and it diversifies the risks of other assets and currencies well within these portfolios. Unlike fiat currency debt, gold has no inherent credit risk or devaluation risk—in fact, it diversifies these risks because when they perform the worst, gold performs the best—making gold almost like an "insurance policy" in a diversified portfolio.
Although silver and platinum have similarities to gold in industrial applications, their historical and cultural significance as stores of value is far less than that of gold. For example, silver's price is more volatile because it is more influenced by industrial demand, even though it has also served as a basis for monetary systems. Platinum, while valuable, has limited supply and specific uses, leading to greater price volatility. Therefore, in terms of wealth preservation, these two metals do not have the universal acceptance and stability that gold does.
Regarding inflation-protected bonds, while they are a decent, underappreciated inflation-hedging asset during normal times (depending on the real interest rates offered at the time), I believe more investors should consider them in their portfolios, but they are still fundamentally debt instruments. So, if a severe debt crisis occurs, their performance will be tied to the creditworthiness of the issuing government. Inflation-protected bonds may also be subject to government manipulation, such as manipulating official inflation data or other related terms. Historical experience shows that during high inflation periods, in countries looking to avoid high debt repayment costs, inflation-indexed bonds commonly face such issues. Furthermore, while they are effective against inflation, their ability to provide diversification or a safety net during systemic financial crises or severe economic downturns is far less than that of gold.
As for stocks, especially in high-growth areas like AI, they undoubtedly have the potential for substantial returns, but their performance has been poor when adjusted for inflation, partly due to their limited ability to hedge against inflation and partly because both the economy and businesses perform poorly during very bad economic conditions.
In summary, gold is a uniquely good diversification tool among these other assets, and diversification is important, so it has a place in most portfolios.
3. At least AI has huge upside potential, debt instruments can pay interest, while gold may just seem stable, and large holders like banks may sell off.
I can understand why you might not like gold, and I don’t want to promote it (or any other investment) because I don’t want to become someone who gives advice. That benefits no one. I just want to share the mechanisms I understand. As for investing, I prefer good diversification rather than any single market, although I will significantly adjust my portfolio based on my indicators and ideas, which has led me to lean heavily towards gold for quite a long time (and still does). If you want to know why, my book "How Countries Fail: The Big Cycle" elaborates on my views much more comprehensively than here.
Regarding the other markets you mentioned, in my view, for AI stocks, their upside potential in the long run depends on the relationship between their prices and future cash flows, which are extremely uncertain; in the short term, it depends on bubble dynamics. I think we should remember the lessons provided by historical situations similar to this, where those breakthrough technology companies were also very popular, just like now. I am not asserting that these companies are necessarily in a bubble—although according to my bubble indicators, there are signs that many companies are already in a bubble. In any case, many aspects of the market and economy depend on whether the performance of companies in the AI boom can exceed the expectations reflected in their pricing; if not, their stock prices will fall. These stocks account for 80% of the gains in the U.S. stock market, the top 10% of earners own 85% of the stocks, and they account for half of consumer spending, while the capital expenditures of these AI companies account for 40% of this year's economic growth, so once a recession hits, it will severely impact the wealth and economy of the public. Clearly, appropriate diversification would be wise.
As for the "debt instruments paying interest" you mentioned, for these debt instruments to become good stores of wealth, they must pay a considerable real after-tax interest rate. There is currently significant pressure to lower real interest rates, and there is an oversupply of debt, with its growth rate exceeding demand. Therefore, we see people shifting from debt to gold for diversification, but the supply of gold is insufficient to meet this demand.
Setting aside tactical considerations, gold is a very effective means of diversifying risk for other investments. If individual investors, institutional investors, and central banks allocate an appropriate proportion of gold in their portfolios for the purpose of risk diversification, then the price of gold will inevitably be much higher, as the total amount of gold is limited. In any case, for me, I want a portion of my portfolio to be gold, and determining that portion's ratio is also important. I do not provide specific investment advice here, but I do suggest that everyone think about this fundamental question: what proportion of the portfolio should be allocated to gold? For most investors, I believe this proportion might be 10% to 15%.
4. Since the price of gold has already risen, should I still hold it at this price?
In my view, a simple and fundamental question that everyone should ask themselves and answer is: if I have no clue about the direction of gold and other markets, what proportion of my portfolio should be allocated to gold? In other words, how much gold should I hold for strategic asset allocation reasons, rather than because I want to make a tactical bet on it? Due to the historically negative correlation between gold and other assets (mainly stocks and bonds), especially when the real returns on stocks and bonds are poor, holding about 15% of gold is the best choice for most people, as it provides the best risk-return ratio. However, since the expected return rate of gold is relatively low in the long term, like that of cash, this better risk-return combination comes at the cost of lower expected returns. Because I prefer a better risk-return ratio and do not want to lower expected returns, I treat my gold position as an overlay in the portfolio or appropriately leverage the entire portfolio, thus maintaining an optimized risk-return ratio without sacrificing expected returns. This is my view on how much gold most people should hold.
As for tactical bets, this is another topic I have shared before, so I won’t elaborate further, but I do not encourage others to do so.
5. What impact does the expansion of gold ETFs (mainly dominated by retail investors) have on the overall trend of gold prices?
The price of any commodity equals the total amount buyers pay sellers divided by the quantity of goods sellers provide to buyers. The motivations of buyers and sellers, as well as the tools used for buying and selling, are certainly important influencing factors. The rise of gold ETFs has provided more trading tools for retail and institutional investors, which overall has increased liquidity and improved transparency, making it easier for a broader range of investors to participate. However, at the same time, the market size of gold ETFs is still far smaller than traditional physical gold investments or central bank holdings, so it is not a major source of demand nor the primary reason for price increases.
6. Has gold begun to replace U.S. Treasuries as a risk-free asset? If so, can gold support large-scale asset transfers?
To your question, objectively speaking, it is indeed the case: gold has begun to replace a portion of U.S. Treasuries in many portfolios as a risk-free asset, especially in the portfolios of central banks and large institutions. The holders of these portfolios have reduced their holdings of U.S. Treasuries while increasing their holdings of gold. By the way, anyone with a long-term historical perspective would consider gold to be a lower-risk asset compared to Treasuries or any other debt denominated in fiat currency.
Gold is the most mature currency—in fact, it is now the second-largest asset held by central banks—and it has proven to be far less risky than all government debt assets. Historically and currently, debt assets are promises from debtors to creditors to deliver funds. Sometimes these funds are gold, and sometimes they are fiat currency that can be printed. Historically, when debt becomes excessive and cannot be repaid with existing currency, central banks print money to repay the debt, leading to currency devaluation. When the currency is gold, they violate the promise to repay in gold and instead repay with printed money; when the currency is fiat, they print money directly.
History shows that the greatest risk lies in the default or devaluation of debt assets like U.S. Treasuries, but the greater likelihood is devaluation. History also shows that gold is a currency and a store of wealth with intrinsic value, so it does not rely on anything other than gold itself to provide value to its holders. It is an eternal and universal currency. History also shows that since 1750, about 80% of currencies have disappeared, and the remaining 20% have experienced severe devaluation.
Related: Opinion: Gold is soaring but still has room to rise
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