Ray Dalio, founder of Bridgewater Associates, warns about risks from inflation, currency devaluation, and rising global debt. He recommends holding gold as part of a diversified portfolio, especially in uncertain times. But why does Ray Dalio recommend gold?
In this article, we explore Dalio’s views. We distill down many of the principles that have shaped his current view of investing. We’ll see why Dalio thinks gold is a hedge against inflation and a defence against today’s fragile monetary systems.
Table of contents
Estimated reading time: 11 minutes
The “Changing World Order” and Economic Cycles
Here is Ray Dalio’s framework for understanding the future.
Dalio’s outlook is shaped by history and economic cycles. He believes the U.S. dollar is losing its role as the world’s dominant currency. With rising debt in the U.S. and China, he predicts a global economic crisis. As political divisions and debt grow, so do risks for investors. To protect against these risks, Dalio suggests investing in gold as a safe haven during uncertain times.
Dalio’s Views on Economic Cycles
Economic cycles swing between growth and contraction. Dalio looks at history to explain how nations rise, peak, and fall. He compares the decline of the British Empire to what is happening today in the U.S. and China.
He says economies expand as debt grows. But, when debts become too large, economies contract. He believes many developed countries, like the U.S., are nearing the end of this cycle. These nations have high debt and use policies that prolong growth, like printing money or cutting interest rates. But these strategies create future risks, such as inflation and currency devaluation.
The U.S.-China Power Shift
Dalio sees a global power shift happening. The U.S. is losing its dominance while China rises. China is gaining influence through smart economic policies, large reserves, and a focus on technology.
The U.S. decline is due to many factors: growing debt, political division, and a loss of competitiveness. Long-term policies, like quantitative easing, have weakened the U.S. dollar. Dalio says this will lead to currency devaluation, making gold a critical asset. As the U.S. dollar weakens, gold will likely hold or increase in value.
Internal Conflict and Global Instability
Ray Dalio warns that growing political, social, and economic divisions in the U.S. are creating internal conflict. Issues like rising inequality and political polarization have weakened the country’s ability to solve key problems. Dalio compares this to past empires that struggled with internal conflict before declining.
This internal conflict also contributes to global instability. Countries dealing with domestic problems are more likely to engage in trade wars or military conflicts. Dalio highlights tensions between the U.S. and China as signs of this instability. During such times, gold tends to perform well as a safe-haven asset, holding value when other financial assets struggle.
Related: Ray Dalio’s cycles closely align with the work of Neil Howe and William Strauss. See: The Fourth Turning and Gold: What’s Still to Come in This Crisis?
Gold as a Hedge Against Inflation and Currency Devaluation
Dalio warns that excessive money printing by central banks leads to currency devaluation and inflation. When inflation rises, cash and bonds lose value. But gold, as a store of value, retains its worth. Dalio argues that holding gold can protect your wealth from these risks.
The Rise of Inflation and Fiat Currency Risks
Inflation has been a growing concern, especially after the 2008 financial crisis and the COVID-19 pandemic. Central banks have flooded the economy with new money. This weakens the purchasing power of fiat currencies, like the U.S. dollar. Dalio sees prolonged inflation ahead, making it harder for people to maintain their purchasing power.
He recommends gold as an inflation hedge. Gold is finite, while fiat money can be printed endlessly. When inflation rises, so does gold’s value. Investors holding gold are protected from the losses caused by inflation.
Dalio’s Critique of Central Bank Policies
Dalio criticizes central banks for relying on monetary stimulus, like lowering interest rates and quantitative easing (a.k.a money printing). These policies, he says, distort markets by encouraging excessive borrowing. Low interest rates create asset bubbles, while quantitative easing devalues currencies.
Dalio believes central banks have run out of options. They have lowered rates so much that they can’t cut them further. He fears the next crisis will force even more money printing, which will devalue currencies even more. In this environment, Dalio argues, gold is one of the few assets that can keep its value.
Historical Precedent for Monetary Collapse
Throughout history, excessive debt and poor monetary policies have led to monetary collapse. Ray Dalio often references Weimar Germany in the 1920s and Argentina in the early 2000s as examples. In both cases, governments printed large amounts of money to cover debts, causing hyperinflation and currency devaluation.
During these crises, gold retained its value, acting as a reliable store of wealth. Dalio believes that today’s global financial system faces similar risks, particularly in times of high debt. He views gold as an essential insurance policy against potential currency collapse.
Related: How Would Hyperinflation in the USA Affect New Zealand?
Diversifying with Gold in Times of Economic Uncertainty
Dalio suggests holding 5-10% of your portfolio in gold. Why?
The Case for Holding Gold
Gold is unique because it has intrinsic value. Unlike fiat currencies, gold can’t be printed. This makes it a hedge against inflation, deflation, and geopolitical risks.
Gold offers diversification. It protects investors from risks related to fiat currencies and debt. Gold’s value tends to remain stable, even when traditional assets like stocks or bonds face volatility.
Gold as a Store of Value
Gold has been a trusted store of value for centuries. During times of economic instability, gold holds its worth while fiat currencies lose value. Inflation erodes the value of money, but gold often rises in price during inflationary periods. This makes it a reliable way to protect wealth.
Why Central Banks Are Buying Gold – Follow Them
In recent years, central bank gold purchases have increased. Countries like Russia, China, and India have added to their gold reserves. Dalio points to these purchases as a sign that even central banks see gold as a hedge against currency devaluation and geopolitical risks.
Central banks are also reducing their reliance on the U.S. dollar by holding more gold. As the dollar weakens, gold helps maintain the value of their reserves.
Gold in Times of Geopolitical Conflict
Gold becomes more valuable during periods of geopolitical conflict. Investors often turn to gold in times of war or political instability, as it is independent of any one nation’s economy.
Dalio points to rising tensions between global powers like the U.S. and China as reasons to hold gold. As conflicts escalate, gold’s value tends to rise. Its ability to perform well in uncertain times makes it a key asset for protecting wealth during global crises.
Related: How Does War Affect the Gold and Silver Price?
When Will Dalio’s Predictions Play Out?
Ray Dalio believes the next 5-10 years are critical. He expects rising inflation, debt defaults, and currency devaluation to shake the global economy. The U.S. and China are both running high deficits, and he warns of an impending financial crisis. According to Dalio, gold will likely hold its value, offering protection for investors as fiat currencies decline.
Here’s how he breaks down his timeline for economic turbulence:
1. Immediate Financial Risks (Next 1-3 Years)
Dalio points to the current economic situation as the early stages of a financial shift. Debt is high, inflation is rising, and central banks are running out of options. He argues that central banks will continue with aggressive policies, which could further devalue currencies. This is why he urges investors to hold gold now.
2. Global Power Shifts (Next 5-10 Years)
Dalio believes China’s rise and the U.S.’s decline will become clearer over the next decade. He expects more geopolitical tensions and trade conflicts. Internal social issues in major countries, especially the U.S., could add to the instability. As the U.S. dollar weakens, gold will become an even stronger hedge.
3. Long-Term Structural Changes (10+ Years)
In the long term, Dalio predicts that the global financial system will undergo major changes. New monetary systems may emerge, possibly backed by gold or other tangible assets. Dalio sees this transition taking decades, but key changes could start within the next 10-20 years. He emphasizes the importance of gold during these times of uncertainty.
In summary, Dalio believes that risks like inflation, currency devaluation, and geopolitical conflict will intensify over the next 5-10 years. He stresses the urgency of diversifying portfolios with gold to protect against these threats.
Here’s a recent interview with Dalio where he covers many of these points. He also comments on gold:
Ray Dalio’s Principles of Investing in a Changing World
Conclusion: The Importance of Gold in a Diversified Portfolio
Ray Dalio recommends holding gold as protection against inflation, currency devaluation, and rising global debt. Whether due to economic instability or geopolitical risks, gold is one of the few assets that consistently holds its value. For investors looking to diversify their portfolios and protect their wealth, owning gold is essential.
Gold has recently been making record highs, leading some people to worry that it will soon head lower. However just think of gold as simply being the inverse of the dollar and other fiat currencies. If you do this, then the risks that Dalio outlines show that gold likely has years of further gains against these currencies to come.
Dalio regularly writes and posts to his LinkedIn profile, so it’s worth following him over there. Or sign up to our newsletter and we’ll keep you updated on his most important writings
For more insights on protecting your wealth and investing in precious metals, explore our Gold Survival Guide blog and subscribe to our Daily Price Alerts.
FAQ
Ray Dalio recommends holding 5-10% of your portfolio in gold as a hedge against systemic risks like inflation, currency devaluation, and geopolitical instability. This allocation helps diversify risk, especially during periods of economic uncertainty when traditional assets may lose value.
Gold serves as a hedge against inflation because its value typically rises when inflation erodes the purchasing power of fiat currencies. Unlike paper money, which loses value during inflation, gold retains or even increases its worth as it is seen as a tangible store of value.
Central banks are buying gold to reduce reliance on the U.S. dollar, diversify their reserves, and hedge against economic risks. Gold’s independence from any specific currency makes it a safer asset in times of financial uncertainty and potential currency devaluation.
Fiat currencies can lose value due to inflation and excessive money printing by central banks. High national debt levels often lead to devalued currencies, which can erode the value of savings. Gold, on the other hand, does not depend on government backing and tends to maintain its value during these times.
Gold is considered a safe-haven asset during geopolitical conflicts. When tensions rise—such as during wars or trade conflicts—investors move their assets to gold for stability. Its value typically increases as confidence in governments or currencies declines.
Economic cycles are patterns of expansion and contraction in the economy. Dalio’s analysis shows that economies rise, peak, and eventually fall due to factors like debt and political instability. Gold becomes crucial during the downturns of these cycles, helping protect wealth when traditional assets decline.
Dalio often cites examples like Weimar Germany in the 1920s and Argentina in the early 2000s. In both cases, governments printed large amounts of money, leading to hyperinflation and currency collapse. During such crises, gold retained its value while currencies lost theirs, proving its worth as a reliable store of value.
Gold is less volatile than stocks and bonds during crises. It acts as a stabilizer in portfolios because it maintains or increases its value during economic downturns, inflation, and geopolitical instability, unlike traditional financial assets which may fluctuate significantly.
Dalio criticizes central banks for overusing tools like quantitative easing and low interest rates. These policies can lead to asset bubbles and currency devaluation. He believes such practices distort natural economic cycles and create risks that can be mitigated by holding assets like gold.
The growing power of China and the decline of the U.S. create global economic shifts that weaken the U.S. dollar. As the U.S. dollar loses influence, gold becomes an important asset for maintaining value, especially for investors wanting to protect themselves against major shifts in global power dynamics.
Besides gold, Dalio advocates for a well-diversified portfolio that includes stocks, bonds, and other tangible assets. Diversification across different asset classes helps reduce risk during economic instability and prevents overexposure to any single market.
A global debt crisis could lead to widespread currency devaluation and economic instability. In such a scenario, gold would likely increase in value, as investors seek out stable assets to protect their wealth from depreciating currencies and financial uncertainty.
I don’t have a problem with gold. My problem is with those other ‘assets’, stocks, bonds and especially real estate that we so love here in NZ. All of these look dismal and dangerous these days. Any other ‘asset’ ideas?
Yes most assets are looking pretty risky in comparison to precious metals. Most are a speculation rather than an investment at current prices. Cryptos might be another area worth considering? Again more of a speculation than gold. But we have some more information here on that: https://goldsurvivalguide.co.nz/how-invest-bitcoin-cryptocurrencies/