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Ray Dalio Made a Call, and Investors Might Not Be Too Late to Follow

In July 2019, Ray Dalio (Trades, Portfolio) published a post titled "Paradigm Shifts" on LinkedIn.

The investor discussed many important factors about investing in capital markets in this article. One that caught the attention of many investors is the section on gold and the guru's thinking that this precious metal will provide stellar returns to investors in 2020. At the time of the post, however, equity markets were still on a roll, and many investors saw little reason to allocate a portion of their portfolios to a safe-haven such as gold, which would only gain in value if risky assets were to tumble. Many market commentators and analysts classified this as an unlikely occurrence.

Fast forward to today and Dalio has already emerged victorious. With renewed fear of a slowdown in global growth, the demand for gold surged in the last couple of months, pushing prices to recent highs.

Source: Goldprice.com

Last October, in an article published on GuruFocus, I outlined four reasons why Dalio might be bullish on this precious metal. Since then, the value of gold has appreciated 10%. Even on the back of such gains, it might not be too late for investors to get onboard with gold investments.

It's not only about generating alpha returns

When equity markets are outperforming all other asset classes, investors jump to the conclusion that the whole idea of investing is to generate alpha returns at any cost.

While the idea behind actively investing is to generate better returns than an index, picking the right companies to invest in is not the only way to achieve this. The trick is to build a balanced portfolio that can weather all market conditions. Such a basket of investments will likely produce the best returns in the long term as investors, analysts and economists can never predict the next market downturn.

Gold prices have shot up in the last couple of months. There's no proven method to calculate an intrinsic value for this metal because, more often than not, the price depends entirely on demand and supply in the marketplace. Therefore, the key is to acknowledge that gold has exhibited low or negative correlations with both equity and bond markets across the globe, and that this relationship provides a natural hedge against a market collapse.

Source: State Street Corporation

An investment in gold should be considered as insurance against weak performance from capital markets. Under normal market conditions, this allocation might not provide any alpha returns. However, it plays an integral part when there's fear. Going by this, I believe there's no reason why investors should not gain exposure to this metal at today's prices. Even if the threat from the outbreak of the new coronavirus diminishes in the next couple of months, another external force will disrupt markets at one time or another. Being prepared is the best thing investors can do today.

A few more reasons

Even after the demand for gold surging in the recent past, investor allocation to gold is still below the historical averages, according to data from Bloomberg.

Source: Bloomberg

State Street multi-asset strategist Benjamin Jones told Bloomberg on Wednesday, "There is room for further demand, particularly on the ETF side. Investor participation in gold is still anemic."

Next, there is still a possibility of Covid-19 becoming a global pandemic, even though the World Health Organization sees no reason for such a classification at this time. The United States reported a new case yesterday, and the situation in Italy and South Korea is not looking good. Under these circumstances, recession fears will remain a feature of markets in the next few months.

However, as I pointed out in some of my recent articles, the negative impact on the global economy will likely be short-lived. Preparing for the worst is not a bad strategy, though, since market performance will never be as smooth as some investors expect it to be.

During the last three recessions, gold outperformed all other asset classes.

Source: Bloomberg

Moreover, there's reason to believe that gold will continue its bull run even after the coronavirus fears subside, primarily because the global economy was already expected to grow at a slower pace this year.

Chief executive officer of Sprott Inc. told Kitco News on Monday:

"What the coronavirus added was a shock to the economy. I would call it a straw that broke the camel's back. Economies were already at best shuffling along with a lot of weakness in Europe and China, and this is going to just push things over the edge."

He went on to add that there's a big possibility of gold breaching the $2,000 mark for the first time ever in the latter half of this year.

Takeaway: it's not too late

Ray Dalio (Trades, Portfolio), on several occasions in 2019 and 2020, called for investors to consider gaining exposure to gold as risky assets might not provide the desired returns in the near future. Ignoring this advice has already proven to be a costly mistake. Even though now might not be the best time to invest in this precious metal (the best time was months ago), it still seems like the opportunity window is open. Even after markets stabilize in a couple of months, gold might continue to gain more ground. In any case, the diversification benefits provided by this asset class to an investor is critical to earning sustainable returns in the long term.

In January, Bridgewater Associates co-chief investment officer Greg Jensen shared three catalysts with the Financial Times that could help gold surge over $2,000 this year:

  1. A permanent shift in the Federal Reserve monetary policy to hold interest rates at record low levels to support economic growth.
  2. An escalation of geopolitical tensions in the Middle East and China that would lead to a permanent slowdown in economic growth in these regions.
  3. Political turmoil in the United States toward the latter part of this year.

The thinking of the world's largest hedge fund is clear. There seem to be different developments in various regions of the world that are pointing to lower than expected growth in the next couple of years. Based on these factors, jumping onboard gold even on the back of a 10% gain within three months seems to be the right decision to me.

Disclosure: I own shares of the SPDR Gold Trust (GLD) ETF

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This article first appeared on GuruFocus.