Ray Dalio: Gold is the safest currency

Ray Dalio, the founder of Bridgewater Associates, pointed out in his latest article that he has received a large number of questions about gold recently, so he decided to focus on answering and compiling a frequently asked questions (FAQ) document about gold (this FAQ was published in mid-October). He also input this content into his "digital avatar" Digital Ray, allowing more people to engage in in-depth discussions on the topic of gold.

Dalio believes that gold indisputably belongs to the category of "currency," and it is the form of currency that is least likely to be devalued or confiscated. He noted that throughout thousands of years of history, gold has been regarded as currency in almost all countries and civilizations, while all other forms of currency have faded away over time.

Dalio categorizes historical currencies into two types: one is "currency backed by hard assets," such as currencies pegged to gold or similar scarce assets (like silver); the other is "fiat currency," which has no asset backing and whose supply is entirely determined by the government and central bank.

The former essentially represents a government commitment—holders can exchange paper currency for gold or silver at a fixed rate; the latter has no exchange support and can therefore be issued indefinitely.

Dalio analyzed that historically, whenever a country implemented a gold standard system, if the amount of debt was too high relative to gold reserves, the currency system would encounter problems. Leaders of various countries typically had two choices when faced with this dilemma:

• First, adhere to the gold standard, leading to debt defaults, liquidity tightening, and deflationary recessions;
• Second, abandon the commitment to the gold standard and alleviate debt pressure by creating currency, but at the cost of currency devaluation and inflation.

Before the establishment of the central bank in the United States in 1913, countries generally adopted the first approach; after the emergence of central banks, they shifted more towards the second approach. Regardless of the path taken, the result was a significant restructuring of debt and currency, ultimately leading to economic rebalancing through rising prices.

Dalio pointed out that the end of the gold standard in 1933 and 1971 are two of the most typical examples in modern times. He further explained that since the decoupling of the dollar from gold in 1971 and the global transition to a fiat currency system, understanding the operational mechanisms of past fiat currency systems in high-debt eras is key to analyzing the current situation.

History has shown that when the total debt is excessively high and the money supply is insufficient, central banks always choose to issue large amounts of currency and credit, leading to inflation and driving up gold prices. In other words, in such situations, gold performs much better compared to "paper debt currency" (i.e., debt-backed paper money). In the long run, gold has a better track record in maintaining purchasing power than all fiat currencies, which is why it has now become the second-largest reserve asset in global central bank reserves, second only to the dollar.

However, Dalio also pointed out that both paper money and gold have their advantages. Paper money can provide better returns than gold in high-interest environments due to interest payments. When interest rates are high enough to compensate for currency devaluation and default risks, holding paper money is more advantageous; but when currency devaluation or credit risks rise and interest rates are insufficient to offset these, gold becomes more attractive.

He emphasized that he does not recommend investors to "time" their buying and selling of gold, but rather to consider gold as part of a long-term holding strategy. He cited data indicating that the real return rate of gold is about 1.2%, and it has a negative correlation with cash. Therefore, from an allocation perspective, a combination of gold and cash can provide good liquidity and protection in almost all economic environments Ray Dalio believes that gold has a unique advantage as a currency—it is harder to confiscate or freeze than other currencies. This is because gold does not rely on the creditworthiness of others or the banking system. Therefore, it is less likely to lose value due to government sanctions, financial crises, or cyberattacks.

He points out that historically, gold has performed exceptionally well in two types of situations: first, during financial or debt crises that lead to high taxes and asset confiscation; second, during economic and financial warfare (such as sanctions or asset freezes). In these phases, gold rises significantly; to be precise, it does not "appreciate," but rather maintains its value while other currencies decline. For this reason, gold has proven to be the most reliable form of currency over the long term, capable of maintaining value in sync with the cost of living over extended periods.

As an investment asset, Dalio emphasizes that his view of gold differs from that of ordinary investors. Most people treat gold as a speculative target, while he sees it as a form of "fundamental money."

In a portfolio, Dalio analyzes gold just as he would stocks, bonds, or cash—examining its expected returns, risks, correlations, and liquidity relative to other assets to determine the strategic allocation ratio.

He notes that investors should first establish a long-term strategic asset allocation rather than making tactical decisions based on short-term market conditions. In other words, the core question of buying gold is not "Will it go up?" but rather "How much gold should I hold in my long-term portfolio?"

Dalio's model shows that in a rationally diversified portfolio, the ideal proportion of gold typically ranges from 5% to 15%, depending on the investor's overall asset composition and risk tolerance. If investors lack market timing ability, they should maintain this strategic ratio rather than frequently trading.

He adds that from a tactical perspective, when the monetary system is in crisis, confiscation risks rise, or economic sanctions are frequent, one should moderately increase their gold holdings; conversely, during stable periods, one can moderately reduce them.

However, Dalio warns that from a long-term perspective, both gold and cash are not high-yield assets, as they are not "productive assets" and do not generate cash flow or profits. Nevertheless, gold remains a type of "fundamental currency" that investors should hold long-term. He also laments that most investors have not allocated any gold at all