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Ray Dalio's 10-Year Bull Case For Gold

Wayne Duggan

The SPDR S&P 500 ETF Trust (NYSE: SPY) has rallied 37.5% in the past three years, while the SPDR Gold Trust (NYSE: GLD) has significantly lagged, gaining just 5.7% in that time. However, Bridgewater Associates hedge fund manager Ray Dalio recently said gold could be gearing up for a bug decade of returns.

Paradigm Shift

In a LinkedIn post last week, Dalio discussed paradigm shifts in financial markets. He said these shifts tend to occur once every decade or so, and the price of gold tends to correlate with the shifts.

Gold outperformed in the 1970s after President Richard Nixon took the U.S. off the gold standard. In the 1980s and 1990s, gold lagged while the S&P 500 gained 2,500%. In the early 2000s prior to the financial crisis, gold tripled in value. From 2008 to 2010, gold prices gained just 10%.

Today, Dalio sees another paradigm shift in global economics. He said massive sovereign debt loads will ultimately force central banks to print more money, which will make dealing with their debt loads more manageable. Given gold is a global store of value and has a limited supply, he said investors and central banks will likely view it as an effective hedge against currency inflation.

'Risky Assets'

Dalio said the world is currently positioned extremely long on “risky assets,” such as stocks, leveraged private equity and venture capital. He said these assets are providing historically low returns relative to cash.

“I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” Dalio wrote. “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

Theory Holds Water

DataTrek Research co-founder Nicholas Colas said gold pays no dividends, but it is an effective hedge against the dollar. In that context, Colas said Dalio’s bullish thesis on gold makes a lot of sense.

“Central banks are therefore a natural buyer, and they have begun increasing their holdings but have plenty more firepower to add to this trade,” he said.

In the past three months, Dalio’s thesis seems to be playing out on the market. The GLD fund is up 11.9%, while the SPY ETF is up just 2.7% overall.

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