Compared to any fiat currency debt, gold is the more essential risk-free asset.

Author: Ray Dalio

Translation: Jin Shi Data

Recently, Ray Dalio, the founder of Bridgewater Associates, shared his views on gold on social media. Below is a summary of his opinions.

The Underlying Logic of Gold

My (Dalio's) perspective on gold and gold prices seems to differ from that of most people. The misconception most people have is viewing gold as a metal rather than the most mature form of currency, while considering fiat currency as real money rather than debt. They believe that central banks will endlessly create fiat currency to prevent debt defaults. This understanding stems from the fact that most people have never lived in a gold standard era and have not studied the historical cycles of debt-gold-currency that have repeated throughout history.

To me, gold is money—it has purchasing power just like cash, with a long-term real return rate of about 1.2%, because it does not generate income itself. But like cash, its purchasing power can be used to create loans, allowing people to build profitable businesses through stock ownership. If these stocks are of high quality and can generate enough cash flow to repay loans, stocks are certainly a better choice. However, when they are unable to repay loans, and the central bank prints money to prevent defaults, the non-fiat currency (gold) will demonstrate its value.

Essentially, gold is a currency similar to cash, but the key difference is that it cannot be printed or devalued. When market bubbles burst or the credit systems between nations collapse (for example, during times of conflict), it becomes an excellent hedge against stocks and bonds.

More accurately, I believe gold is the most robust fundamental investment, rather than a regular commodity. It is a currency like cash, but unlike credit instruments that create debt, it directly completes transaction settlements—payments can be made without creating debt and can directly settle debts.

For some time now, the supply and demand relationship between debt currency and gold currency has fundamentally changed. Considering their respective supply-demand ratios and potential bubble sizes, I choose to firmly hold my gold position in my portfolio. Those investors who hesitate between "zero holdings" and "underweight holdings" are likely making a strategic mistake.

Aren't silver, platinum, or inflation-protected bonds better choices?

While other metals also have inflation-hedging functions, gold holds a unique position in the asset allocation of investors and central banks: it is the most widely accepted medium of exchange and store of wealth for non-fiat currency, effectively diversifying the risks of other assets and currencies.

Unlike fiat currency debt, gold has no inherent credit risk or devaluation risk—in fact, gold performs best when other assets perform the worst, serving as a sort of "insurance policy" in a diversified portfolio.

Although silver and platinum have similar properties, they lack the same historical depth as a store of value. Silver prices are more driven by industrial demand and are more volatile; platinum is limited by its scarcity and specific industrial uses. In terms of the core function of wealth preservation, they cannot compare to gold's widespread acceptance and stability.

Inflation-protected bonds are decent hedging tools during normal times (depending on real interest rates), but they are essentially debt commitments. Once a significant debt crisis occurs, their performance entirely relies on the credit of the issuing government. Historically, during periods of high inflation, governments often manipulate inflation data to reduce actual repayment costs. Therefore, in a systemic financial crisis, they cannot provide the same level of safety as gold.

As for high-growth stocks like AI, while they have considerable upside potential, their historical performance during severe inflation and economic distress has indeed been disappointing.

Gold has irreplaceable diversification value and should occupy a place in most portfolios. But with gold prices currently high, is it wise to hold it now?

How much gold should be in the portfolio?

Historical data shows that due to the negative correlation between gold and stocks and bonds (especially during periods of simultaneous declines in stocks and bonds), an allocation of about 15% can provide the optimal risk-return ratio. However, the cost of this optimized portfolio is a reduction in long-term expected returns.

My personal approach is to treat gold positions as an overlay in the portfolio or to appropriately leverage the overall portfolio, thus maintaining an optimized risk-return ratio without sacrificing expected returns. This is my constructive suggestion for most people's gold allocation.

As for tactical timing, that is another complex topic, and I generally do not encourage ordinary investors to attempt it.

How does the rise of gold ETFs affect gold price trends?

The price of any asset equals the total amount of buying funds divided by the supply from sellers. Gold ETFs do indeed enhance market liquidity and transparency, lowering the barriers to participation. However, it should be clear that the market size of gold ETFs is still far smaller than that of the physical gold market and central bank holdings, and they are not the main driving force behind the current rise in gold prices.

Is gold replacing U.S. Treasuries as the new "risk-free asset"?

Indeed, this is the case. In the portfolios of many central banks and institutional investors, gold is systematically replacing U.S. Treasuries as the risk-free asset. Investors with historical perspective understand that compared to any fiat currency debt, gold is the more essential risk-free asset.

Gold is currently the second-largest reserve currency for central banks, with historical risks far lower than all government debts. Debt assets are essentially repayment commitments, and when debt becomes excessive, historically, governments have only had two choices: default or devalue. Since 1750, 80% of fiat currencies have disappeared, and the remaining 20% have all significantly devalued.

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