Bridgewater founder Dalio: A 15% allocation to gold is the best choice for most people.

Author: Ray Dalio, Founder of Bridgewater Associates

Compiled by: Felix, PANews

Recently, gold prices have been rising sharply, with the spot price of London gold reaching a maximum of 4380.79 USD/ounce during the trading session, having increased by over 60% since the beginning of the year. In response, Ray Dalio, the founder of Bridgewater Associates, recently posted on platform X, sharing his views on gold. Here is the full content.

Thank you all for the wonderful questions about gold. I will do my best to answer them and share my answers in this article.

1. You seem to have a different perspective on gold and its prices compared to most people. How do you view gold?

You are right. I think most people make a mistake by treating gold as a metal rather than the most mature form of currency, treating fiat currency as money rather than debt, and believing 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 at almost all times. However, anyone who has witnessed the evolution of gold-currency and debt-currency over time will have a different perspective.

In other words, to me, gold is a currency just like cash — over the long term, its real return rate is about 1.2%, roughly the same as cash — because it doesn’t produce anything; and gold also has purchasing power that can be used to create lending funds and help people build profitable businesses through stock holdings. If those stocks are solid and generate the cash needed to repay loans, then certainly 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 a currency just like cash, except that it cannot be printed and devalued like cash. When the stock market bubbles burst and/or countries no longer recognize each other's credit, such as during wartime, gold is a good diversification tool for stocks and bonds.

In my opinion, gold is the most reliable fundamental investment, rather than just a metal. Gold is a form of currency 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 fees without incurring debt, and it can also repay debt.

In conclusion, for a period of time, I believe that the relative supply and demand relationship between fiat currency and gold currency is changing, and the value of fiat currency is declining relative to the value of gold currency. As for the reasonable price of debt currency relative to gold currency, considering their respective supply-demand ratios and the potential scale of any bubble burst, I am clear that I should retain a portion of gold in my portfolio. I believe that those investors who are torn between holding no gold at all and holding a small amount of gold are making a strategic mistake.

2. Why gold? Why not silver, platinum, or other commodities, or hold inflation-protected bonds as you suggested?

Although other metals can also effectively withstand inflation, gold occupies a unique position in the portfolios of investors and central banks because it is the most widely accepted form of non-fiat currency for trade and a means of storing wealth. Additionally, it diversifies the risks of other assets and currencies within these portfolios. Unlike fiat currency debt, gold does not have inherent credit risk or devaluation risk—in fact, it mitigates these risks because when they perform the worst, gold performs the best—almost like an “insurance policy” in a diversified portfolio.

Although silver and platinum share similarities with 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 highly volatile because it is more influenced by industrial demand, even though it has also served as a foundation for monetary systems. Platinum, while valuable, has limited supply and specific uses, leading to significant price fluctuations as well. Therefore, in terms of wealth preservation, both metals lack the universal acceptance and stability that gold possesses.

Regarding inflation-protected bonds, although they are a good, 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. Therefore, if a severe debt crisis occurs, their performance will be linked 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 periods of high inflation, inflation-indexed bonds commonly face such issues in countries looking to avoid high debt repayment costs. Moreover, although they are effective against inflation, their role in providing diversification or safety nets during systemic financial crises or severe economic distress is far less than that of gold.

As for stocks, especially those in high-growth areas like AI, they undoubtedly have the potential for substantial returns. However, after adjusting for inflation, their performance has been poor, partly because their ability to withstand inflation is limited, and partly because both the economy and businesses tend to perform poorly during very unfavorable economic conditions.

In summary, gold is a unique and good diversification investment tool among these other assets, and diversification is important, so it has a place in most investment portfolios.

3. At least AI has huge room for growth, debt instruments can pay interest, while gold may only seem stable, and large holders like banks may sell off.

I can understand why you don't like gold, and I also don't want to promote it (or any other investment) because I don't want to become someone who gives advice. That doesn't benefit anyone. I just want to share the mechanisms that I understand. As for investing, I prefer good diversification rather than any single market, although I significantly adjust my portfolio based on my indicators and ideas, which for quite a long time (and still does) has made me heavily inclined towards gold. If you want to know the reason, my book “How Nations Go Bankrupt: The Big Cycles” elaborates on my views much more comprehensively than I can here.

As for the other markets you mentioned, in my view, for AI stocks, their long-term upside potential depends on the relative relationship between their price and future cash flows, which are highly uncertain; in the short term, it depends on bubble dynamics. I believe we should keep in mind the lessons provided by similar historical situations, 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 my bubble indicators suggest that many companies show signs of being 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 they cannot, their stock prices will fall. These stocks account for 80% of the gains in the U.S. stock market, with the top 10% of income earners holding 85% of the stocks and accounting for half of consumer spending, while the capital expenditure of these AI companies represents 40% of this year's economic growth. Therefore, once an economic recession occurs, it will have a serious impact on people's wealth and the economy. Clearly, appropriate diversification in investments would be wise.

As for the “debt instruments paying interest” you mentioned, these debt instruments must offer a considerable real after-tax interest rate to become a good store of wealth. Currently, there is significant pressure to lower real interest rates, and there is an oversupply of debt, with its increase outpacing demand. As a result, we see people shifting from debt to gold for diversification, but the supply of gold is insufficient to meet this demand.

Leaving 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 investment portfolios to mitigate risk, then the price of gold will inevitably be much higher, as the total amount of gold is limited. In any case, for me, I hope to have a portion of gold in my investment portfolio, and determining the proportion of this portion is also very important. No specific investment advice is provided here, but I do suggest that everyone think about this fundamental question: what proportion of the investment portfolio should be allocated to gold? For most investors, I believe this proportion may be between 10% and 15%.

4. Since the price of gold has already increased, should I still hold it at this price level?

In my opinion, a very simple and fundamental question that everyone should ask themselves and answer is: how much of my portfolio should be allocated to gold if I have no clue about the direction of gold and other markets? 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 optimal for most people, as it provides the best risk-return ratio. However, since the expected return on gold is relatively low in the long run, just like the return on cash, this better risk-return combination comes at the cost of lower expected returns in the long term. Because I prefer a better risk-return ratio and do not want to lower expected returns, I treat my gold position as an overlay on my 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 betting, this is another topic I have shared before, and I won't elaborate further on it here, but I do not encourage others to do the same.

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 is equal to the total amount the buyer gives to the seller divided by the quantity of goods the seller provides to the buyer. 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 individual and institutional investors with more trading tools, which has generally increased liquidity and improved transparency, while making it easier for a wider range of investors to participate. However, at the same time, the market size of gold ETFs is still far smaller than that of traditional physical gold investments or central bank holdings, so it is not a major source of demand and not the primary reason for price increases.

6. Has gold begun to replace U.S. Treasury bonds as a risk-free asset? If so, can gold support large-scale asset transfers?

Regarding your question, objectively speaking, this is indeed the case: Gold has begun to replace a portion of U.S. Treasury bonds in many investment portfolios as a risk-free asset, especially among central banks and large institutional portfolios. Holders of these portfolios have reduced their holdings of U.S. Treasury bonds 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 Treasury bonds or any other debt denominated in fiat currency.

Gold is the most mature currency—indeed, it is now the second largest asset held by central banks around the world—and it has proven to be significantly less risky than all government debt assets. Historically and currently, debt assets are the promises made by debtors to creditors to deliver funds. Sometimes these funds are in gold, and sometimes they are in 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, which leads to currency devaluation. When the currency is gold, they violate the promise to repay in gold and instead repay by printing money; whereas when the currency is fiat, they directly print money.

History shows that the greatest risk lies in the default or devaluation of debt assets like U.S. Treasury bonds, but the more likely scenario is devaluation. History also indicates that gold is a currency and a store of wealth with intrinsic value, thus it does not rely on anything other than gold itself to confer value to its holders. It is a timeless and universal currency. History further demonstrates that since 1750, approximately 80% of currencies have disappeared, while the remaining 20% have experienced significant devaluation.

Related reading: Opinion: Gold is soaring but still has room to rise