Ray Dalio: Gold Reduces Risks, Enhances Returns

Ray Dalio’s 5 wars of our time (and how to navigate them)

Bullion.Directory precious metals analysis 09 May, 2022
By Peter Reagan
Financial Market Strategist at Birch Gold Group

In order to make sense of the following, you have to understand the premise of Dalio’s book Principles for Dealing with the Changing World Order (Why Nations Succeed and Fail). Here’s that book, in a nutshell:

The times ahead will likely be radically different from those we’ve experienced in our lifetimes—but similar to those that have happened many times before. Studying history lets us find recurring patterns that determine likely future developments.

In other words, history repeats itself in ways the knowledgeable can recognize. Dalio makes an extremely compelling case in his book, which is a must-read. For those of us who don’t have the time to digest all data-packed 576 pages, Dalio recently gave a sort of back-of-the-envelope sketch to The Economic Times. Where are we today?

All of the hallmarks of the end of a global reserve currency regime are here. They are as follows:

#1: Governments run out of money

First, when governments run out of money, they need more money than they can get. They create a lot of debt and they print a lot of money.

Sound familiar?

“We have had the largest debt increases and money creations particularly in the leading world reserve currency, the dollar, although that has been true in the case of euro and it has been true in the yen too and that has a big effect,” Dalio said.

By itself, this doesn’t spell the end of a global reserve currency…

#2: Conflict between left-wing and right-wing populists

Dalio offers us a handy definition of “populism:”

Populism consists of people who are representatives who will fight for their way of doing things, rather than compromise.

He goes on to describe the current U.S. political situation as, “almost a civil war.” He points out that open conflict in the U.S. could be as near as “an election in which neither side accepts losing.”

Obviously, an internal conflict would be incredibly disruptive far beyond our nation’s borders. But that’s not all…

#3: The rise of new economic superpowers

Back when our current monetary system was designed, in 1945, the U.S. was the wealthiest nation on earth. We owned 80% of the world’s gold reserves (back when gold was money), and half the entire world’s economic and military strength.

Dalio believes that the U.S. is experiencing a “relative” decline on the global stage, with countries like China waiting in the wings to steal the spotlight. As Dalio points out, these power struggles have historically been solved through conflict of one kind or another – and he believes the U.S. is facing 5 different wars right now: a trade war, a technology war, a geopolitical war, a capital war and a military war. (We’ll gloss over the details of all these battles.)

Dalio sees a stagflationary period as a given, considering both historical precedent and our present reality. For the ordinary investor, certainly one dealing in U.S. dollars, Dalio says that the options are few and far between. During periods of stagflation, physical gold and other commodities break out while most other asset classes (especially risk-on investments) underperform. Much of Dalio’s practical advice in his book reiterates the importance of savings diversification, with the renowned investor emphasizing that a lack of correlation between assets should be paramount.

To be fair, Dalio has long recommended diversification with gold. For example, in 2019 he told the International Business Times:

I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.

If we’d followed Dalio’s advice and bought told on 17 July 2019, we’d be up 30% on that investment today. The man is founder of the world’s largest and arguably most successful hedge fund. Maybe his words are worth heeding!

Recessionary risks put Fed’s credibility further into question

Gold’s fall below $1,900 was certainly overshadowed and brought on by a broad market selloff after the Federal Reserve hiked interest rates by 50 basis points. Ruling out a 75-basis point hike was not enough to prevent risk-on markets from going into the red, with only gold, Treasuries and the dollar having any solid footing.

A number of analysts told Kitco that sentiment rather than rational thought drives markets right now, and a recession is virtually guaranteed.

Edward Moya, a senior market analyst at OANDA, said:

Many traders thought that the Fed needed to keep all options on the table to aggressively fight inflation. But the Fed is signaling they believe inflation is peaking. There is this fear that possibly the Fed made a mistake and might have to send the economy into a recession a lot sooner.

Another analyst doubled down on Moya’s statements, saying the Fed had a “credibility problem.” Despite this, what look to be successive rate hikes have boosted the Treasury market and sent the U.S. dollar to what some believe are peaking highs. This has been the primary near-term downwards driver for gold, which should otherwise have a very favorable backdrop. Analysts added that the gold market could see another selloff of this magnitude before the move to new highs starts.

The release of the CPI data for April is undoubtedly what everyone is watching right now. Markets are projecting a favorable outcome by expecting the inflation rate for April to clock in at 8.1%, below March’s 8.5%. Even if achieved, the road to normalizing the rate back to 2% will be a long one. But if there is any signal that the Fed hasn’t gotten a handle on inflation, sentiment towards the dollar could turn bearish very quickly.

Gold: Watch for a May breakout after shaky April

As Sprott’s Paul Wong notes, gold is still holding onto a 3.70% year-to-date gain after considerable tumult in April and so far this month. The U.S. dollar climbed 4.7% in that timeframe, adding to downwards pressure. Another difficulty postponing gold’s breakout came in the form of a “de-grossing” broad market selloff which, among other things, had Nasdaq posting its worth month since 2008.

Wong believes gold could be preparing to turn to the upside, especially given the broader environment. For starters, Wong depicts a currency war scenario given the U.S. dollar’s recent strength compared to both the yen and the yuan, the former having slumped to a 20-year low. As other central banks turn dovish, the Fed is embarking on its most hawkish cycle in decades.

Wong agrees with many analysts that the Fed’s interest rate-hiking endeavor is a risky one, and that it places the Fed under the risk of “overdoing” it and impacting equities, credit and bonds.

With inflation expectations as present as ever, Wong says that gold is very well-positioned. The analyst also took note that silver remains conspicuously undervalued and, as the more volatile metal, could be due for even more gains as investment demand collides with strains in the manufacturing sector.

Feature image CC BY-NC-SA 2.0 courtesy of World Economic Forum

This article was originally published here

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