Bridgewater on gold: 'It's wise to hold some of what central banks can't create more of'
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(Kitco News) Gold is not too expensive and it is not too late to get in, the Ray Dalio-led hedge fund Bridgewater Associates LP said in its September report.
“In a world of ongoing pressure for policymakers across the globe to print and spend, zero interest rates, tectonic shifts in where global power lies, and conflict, gold has a unique role in protecting portfolios,” said the report titled Some Perspective on Gold in the New Paradigm. “It’s wise to hold some of what central banks can’t create more of.”
The key point the hedge fund makes is that gold’s rally to $2,075 an ounce this year was, in fact, “quite modest” in comparison to the precious metal’s past moves during reflationary periods.
“Gold has rallied ~30% year-to-date against the dollar and a comparable amount against other developed world currencies, buoyed by fiscal and monetary stimulation of a magnitude unprecedented during peacetime,” Bridgewater said. “These are classic reflationary dynamics that more likely than not are still in their early innings … We’ve had a few such periods of extraordinary stimulus over the past century—all in times of economic depression, conflict, or both—and in all of them, gold saw triple-digit rallies that dwarf its recent run-up.”
This could mean that gold has a lot of upside potential before this bull market is over, according to the $138 billion hedge fund.
The consequence of reflationary policies is the devaluation of paper currencies, an environment where gold thrives. “These dynamics were manifest in the triple-digit run-up in gold during QE1 and QE2, and we’ve begun to see them at work today,” Bridgewater pointed out.
Gold is one of the few assets that can protect investors from currency depreciation, especially during times of massive money printing and zero percent interest rates.
“Paper currencies are offering the worst deal ever, providing little incentive to hold them relative to gold … Given how much ongoing printing and spending will be needed, and given that replacing lost incomes is inherently more inflationary than replacing credit (as it doesn’t replace the supply those incomes were paying for), we could very well see inflationary pressures mount while the economy remains weak,” the report explained.
In this context, gold is not too expensive to get into right now, especially when compared to other stores of wealth, the report added.
“As investors have become more comfortable with the safety of fiat money, and as inflation hasn’t been a problem during the lifetimes of so many investors, very little of the enormous piles of paper money that have been printed has made its way into gold,” Bridgewater noted. “The same holds true when comparing the value of the world’s gold stock to the market cap of financial assets. Investor allocations to gold are relatively low compared to history, and particularly compared to prior periods of paper currency devaluation that ultimately created inflation.”
On top of this, gold, which offers no yield, is more appealing in a portfolio at the moment because the yields that financial assets are offering right now are unattractive, the report highlighted.
“Not just real cash rates but also 10-year real yields are now negative, implying that bond returns will not keep up with inflation. This yield compression has affected all financial assets, driving equity multiples up and yields down,” the hedge fund said.
Bridgewater examined gold’s performance during deflation, reflation, and stagflation.
“In the case of a deflationary downturn without enough stimulus … gold fares relatively better as an asset that is no one else’s liability that could be defaulted on … In a successful reflation … gold is generally buoyed as well … Stagflation eats away at real returns of paper currency assets, while gold tends to shine as a real storehold of value,” the report noted.
The yellow metal also protects investors from any potential region-specific conflict, adding another layer of safety, Bridgewater stated.
Investors are not advised to wait until gold’s market value expands relative to other financial assets. At that point, it might be too late to get in.
“A key reason the market appears ‘small’ today is precisely that not much liquidity has flowed there yet compared to all the liquidity sloshing around financial markets. At today’s valuations, a relatively small number of investors making relatively small shifts in asset allocations can still have a big impact on the gold market. So delaying until liquidity increases essentially means waiting until gold has become more expensive,” the report noted.