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Investors would be wise to include gold in their portfolios, as the value of currencies will come under pressure in the coming years. That's what asset manager said Ray Dalio Bridgewater Associates recently in a interview with CNBC Asia.
He notes that central banks are becoming less and less effective at stimulating the economy, leaving governments with an increasingly important role. They can apply new fiscal stimulus, but that will be at the expense of the value of the money.
According to Dalio, the temptation to monetize government spending is increasing. In other words, to introduce new fiscal stimulus programs that are indirectly financed by central banks. He has the following to say about it.
"I think the conditions have become riskier now. We are in an environment where it is becoming more difficult to stimulate and where there is a desire to bring down the value of currencies. Think of a bond, which is basically money. So if you have a bond, or any other debt paper, you will be paid in currency in the future.
When there is a lot of debt or even unsecured debt obligations, such as pension obligations and health care costs, and there is no effective monetary instrument to lower interest rates and stimulate the economy, money has to be printed. We are now entering a situation of larger government deficits that will be increasingly monetized. And in that environment, the value of currency is eroded. That's the easiest way to pay off your debts."
According to Dalio, we are now in a special situation, because we have come to the end of both the long and short debt cycles. This means that central banks have few tools to support the economy. He also sees rising tensions in the world as a result of increasing wealth inequality and protectionism. He sees strong similarities between the present time and the 1930s.
"We are at the end of the short and long debt cycle. This means that the capacity of central banks to stimulate, through lower interest rates and quantitative easing, will become a problem. This is not an acute problem, but one that will emerge in the next one to two years. You see it in Europe, in Japan, and also to some extent in the United States.
In addition, there is a lot of wealth inequality and therefore a classic political conflict, very similar to the 1930s. That means there's more polarization, more extremes in both directions. That will play a role, because if you change the policy, it will have a lot of effect. When Trump implemented that corporate tax cut, stock prices skyrocketed.
So we have the polarity of the 1930s, combined with the inability of central banks to stimulate. In addition, China, as an emerging economy, will challenge the United States as an established world power. This creates a protectionist environment, similar to the 1930s. This has consequences for all kinds of conflicts.
It will also throw sand in the engine of the global economy. Think, for example, of technology and production chains. We have built a global economy that relies on interdependence. Now that we are entering an environment of conflict, countries must regain their independence for their own security.
The United States says it doesn't want Chinese technology anymore, while the Chinese say they can't rely on American technology anymore. These influences are very similar to the 1930s and will become dominant. They are evolutionary influences that will manifest themselves in the coming years.
The world we end up in is a very different world than the one we were in. It started in 2008 with central banks printing and stimulating money. That is now reaching its limits and therefore expected a change in the paradigm."
In the interview, Dalio says that Buy gold is very attractive at the moment, because it offers protection in times of uncertainty and currency depreciation. Still, he advises people not to bet everything on gold now, because the future is difficult to predict. According to him, the precious metal belongs in a well-diversified investment portfolio. He foresees that the Gold price will continue to increase in the coming years.
"Gold is an important tool for portfolio diversification. But let me be very clear. I don't think anyone should have a very concentrated portfolio at the moment. People can zoom in on one statement I make, but the starting point that you have a balanced portfolio is the most important. That's because power doesn't evaporate, it shifts.
The world, in my view, is largely focused on taking positions with borrowed money. In other words, a lot of money is borrowed to buy assets. Companies borrow money to buy back shares, and so on. A portfolio that is set up for this is vulnerable and gold is one of the instruments to diversify that risk. But I know that this statement will be taken out of context, that the media will say that you have to buy gold. It shouldn't be too much, but it shouldn't be too little either. Just part of your portfolio."
