Billionaire investor Ray Dalio, founder of Bridgewater Associates, is urging investors to rethink gold, arguing it should be treated as fundamental money and a core portfolio holding. He recommends an allocation of 5% to 15% in the precious metal to protect against the inherent risks of modern currency systems.
In a detailed analysis, Dalio explained that gold's primary role is not for speculative gains but as a long-term store of value with a unique ability to shield wealth from devaluation and confiscation, particularly during periods of economic instability.
Key Takeaways
- Ray Dalio views gold as fundamental money, not a speculative asset.
- He recommends a strategic allocation of 5% to 15% of a portfolio to gold.
- Gold offers protection against fiat currency devaluation, especially during debt crises.
- The metal has lower confiscation risk compared to other assets during financial or geopolitical turmoil.
- Dalio advises against market-timing gold and instead promotes it as a permanent, strategic holding.
A Historical View on Money and Debt
Dalio frames his argument within a historical context, dividing money into two categories: asset-backed currencies, like those linked to gold, and fiat currencies, which are not backed by any physical commodity. He notes that throughout history, monetary systems have faced repeated breakdowns.
When asset-backed systems became over-leveraged with debt, governments faced a choice. They could either honor their commitment to redeem currency for gold, which often led to severe debt defaults and deflationary depressions, or they could break that promise. Breaking the link allowed them to print more money, which devalued the currency and led to inflation.
The Post-1971 Fiat Era
Since 1971, the world has operated entirely on a fiat currency system. Dalio emphasizes that this makes the lessons from past fiat system collapses particularly relevant today. In these scenarios, central banks consistently resort to creating large amounts of money and credit to manage debt burdens.
This path of money creation, according to Dalio, inevitably leads to higher inflation and, consequently, higher gold prices. Gold performs well in these environments because it acts as a reliable alternative to what he calls "paper debt money."
Gold's Unique Protective Qualities
One of the most compelling attributes of gold, in Dalio's view, is its resilience against confiscation. This makes it distinct from nearly all other financial assets.
"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," Dalio stated. He also noted it cannot be stolen through cyberattacks.
This physical security becomes critical during times of significant risk, such as:
- Financial Crises: When governments may impose very high taxes or other confiscatory policies.
- Economic and Monetary Wars: In periods of geopolitical conflict, assets can be frozen or seized through sanctions.
During such events, Dalio observes that gold's value tends to rise significantly. More accurately, he suggests that gold holds its value while fiat currencies fall. "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," he explained.
A Central Bank Favorite: Gold's reliability is why it is now the second-largest reserve currency held by central banks globally, underscoring its role as a foundational monetary asset.
Strategic Allocation vs. Speculative Trading
Dalio is critical of the common approach many investors take toward gold, which is to treat it as a speculative trade to be timed for market highs and lows. He believes this is a fundamental mistake.
"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. He argues that most investors lack the ability to successfully time markets and should instead focus on building a robust, diversified portfolio.
Building a Resilient Portfolio
For Dalio, the first question an investor should ask is not "should I buy gold now?" but rather "what amount of gold should I always have in my portfolio?" His analysis suggests a strategic allocation between 5% and 15%, depending on the other assets in the portfolio and an individual's risk tolerance.
This strategic holding serves as a permanent form of insurance. While it may underperform other assets during stable economic times, its value becomes apparent when financial systems are under stress.
When to Make Tactical Adjustments
While his primary focus is on the strategic case, Dalio does acknowledge a role for tactical adjustments. He advises that investors should consider overweighting their gold allocation during specific periods:
- Monetary System Breakdowns: When there is a high risk of currency devaluation due to excessive money printing.
- High Confiscation Risks: During wars or severe economic crises where asset seizures or extreme taxation are likely.
Conversely, he suggests underweighting gold during periods of economic stability. Over the long run, he notes that gold has been a "relatively poorly performing asset" compared to productive assets like stocks because it does not generate income. However, its purpose is not to generate returns but to preserve wealth.
Dalio's overarching message is clear: investors who own no gold are overlooking a fundamental component of a sound financial strategy. "You should think of gold as being a fundamental money that you should own at least some of," he concluded. "Most investors don’t own any."
