Bridgewater Associates founder Ray Dalio: Gold is the safest currency

Author: Ray Dalio, Founder of Bridgewater Associates; Source: X, @RayDalio; Translated by: Shaw Jinse Finance

Recently, I've received a lot of questions about gold, so I decided to answer them all and compile them into a compilation of frequently asked gold questions. I've also added this content to my "digital avatar," Digital Ray, so that more people can discuss this topic in depth.

But I'd also like to briefly share what I believe are the most important points about gold, which is the purpose of this article.

In my opinion, gold is a form of currency, and one with the least risk of devaluation and/or confiscation—that's beyond question.

Here are the reasons why I believe this is the case.

For thousands of years, gold has been considered currency in almost every country, while all other currencies have disappeared. Its operation is as follows, and remains so today. Throughout history, all currencies (i.e., circulating currencies) have either been: 1) "Gold-pegged/hard-asset-backed" currencies, referring to currencies pegged to gold or similar globally recognized assets with limited supply (such as silver). These currencies are backed by government commitments allowing individuals or governments to exchange "paper money" for gold (or other "hard assets," such as silver) at a fixed exchange rate. 2) "Fiat" currencies, referring to currencies not pegged to any asset/not backed by any asset, and therefore their supply is unlimited. Historically, when a monetary system is pegged to gold and the debt (i.e., the commitment to deliver gold money) is too high relative to the existing total amount of gold money, the monetary system collapses. This is because world leaders either: a) adhere to their commitment to gold-backed currencies, leading to debt defaults and deflationary depressions; or b) break their promise to deliver gold at the promised price, thereby creating a large amount of money and credit, which typically leads to currency devaluation, which in turn drives up inflation and gold prices. Before the advent of central banks (introduced in the US in 1913), economies generally followed a) a deflationary path; after the advent of central banks, they followed b) an inflationary path. Either way, this leads to a severe collapse/crisis of the debt/monetary system, reducing the debt-to-income ratio and ultimately fixing prices at a new, higher level. (This is why prices rise over time.) The two most recent collapses of gold-backed monetary systems occurred in 1933 and 1971. In 1971, we abandoned the gold-backed monetary system and adopted a fiat currency system. Because we are now in a fiat currency system, studying what happened in the past when fiat currency systems had excess debt relative to the funds needed to repay it is particularly relevant to the present. In those situations, central banks would invariably issue large amounts of money and credit, which typically led to higher inflation and rising gold prices. In all these cases, gold performed exceptionally well as an alternative to "paper debt money." It is the strongest store of value in the long run. This is why it is now the second largest reserve currency held by central banks worldwide. However, this does not mean that other currencies are less effective at storing wealth than gold in the long run. This is because "paper money" generates interest, while gold does not. Therefore, when interest rates depreciate more rapidly relative to paper money, these paper currencies can generate higher returns. If one chooses to engage in market timing (which I advise against), then one should hold paper money when interest rates are high enough to offset the default and depreciation risks of holding paper debt. However, when interest rates are insufficient to compensate for the devaluation and default risks of paper currency debt, holding gold is the wise choice. Alternatively, one can choose not to try to time the market but instead hold a certain amount of gold. Like cash, gold has a low real yield of approximately 1.2% and is negatively correlated with cash. Therefore, in any environment requiring liquidity, gold and cash can be considered good options. Gold is also favored because it carries a lower risk of confiscation than other currencies and assets. This is because gold's value does not depend on payments from others, and it is more difficult for individuals or governments to confiscate it. Gold is the most difficult currency to seize because it can be safely held by individuals, unlike other currencies that require payments to acquire value. It is also not susceptible to theft in cyberattacks. Therefore, when there is a high risk of currency confiscation, such as: a) financial crises leading to high taxes and other confiscation policies; b) economic and currency wars between nations (e.g., sanctions), gold becomes the preferred asset. Therefore, during periods of currency/debt crisis and/or war, when the risk of foreclosure increases, the value of gold rises significantly (or more accurately, it is the only currency that does not depreciate). This is why gold has long been the most fundamental currency and, for a very long time, its value has kept pace with the cost of living, boasting the best track record. This is how the debt/currency/gold dynamic works, and it remains so today. This is especially true when debt is large relative to the amount of money needed to repay it, and when there is the risk of foreclosure. As an investment asset, I treat gold like any other asset when constructing a portfolio, examining its expected returns, risks, correlations with other assets, and liquidity to develop a strategic asset allocation plan. Then, I consider tactical adjustments to the portfolio based on market dynamics. Therefore, I believe that gold, as part of an investment portfolio, has certain characteristics, much like holding a certain amount of cash. This view is quite different from how most people view gold, who generally see it as a speculative market. Viewing gold as a base currency has been very helpful to me, and perhaps you should consider it too. If you disagree with my view, please let me know, and we can discuss the truth together to better address this issue. When I consider how much gold should be held in an investment portfolio, I first and foremost consider it as a strategic asset allocation, not a tactical/market timing decision. I believe that everyone should start investing by understanding and holding an investment portfolio that best suits them, unaffected by any market timing perspective. Adjustments to an existing portfolio should only be made when investors believe they have a greater ability to time the market and determine which investments are better. Most investors do not possess this ability, therefore they should stick to their established strategic asset allocation. Therefore, when investors ask me whether they should decide to buy or sell gold based on price fluctuations, I tell them it's a secondary strategic question. Their primary concern should be how much gold they should hold in their strategic asset allocation. Based on my own analysis, this percentage ranges from 5% to 15%, depending on the other assets in their portfolio and their risk appetite. As for tactically overweighting or underweighting gold in a portfolio based on market timing, as mentioned earlier, gold should be overweighted when the risk of monetary system collapse, currency confiscation, and economic/currency wars (such as sanctions) is high; and underweighted at other times, because gold has historically been a relatively poor-performing asset (like cash) because it is not a productive asset. In short, what I'm trying to say is that you should treat gold as a base currency and hold at least a certain percentage of it. However, most investors do not hold gold.