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As investors flee U.S. stocks, stay away from cash, says Ray Dalio

Kitco News

(Kitco News) With markets plunging on a more hawkish Federal Reserve and omicron fears, Bridgewater Associates' Ray Dalio reminded investors to stay away from cash, stating that it will be eaten away by inflation.

"Cash is not a safe investment…because it will be taxed by inflation," the founder of the world's biggest hedge fund told CNBC on Tuesday.

Dalio explained that during periods of market volatility, the key is to have a well-balanced portfolio, stating that wealth is rotated.

"It's a fool's journey to time the way into the market and out of the market … Even if you were a great market timer, the things that are happening can change the world, so it changes what could be priced into the market," Dalio said.

The billionaire advised transferring your wealth. "Know how to balance a portfolio. When equities go down, then you see the bond market, gold go up. Wealth is not destroyed as much as it is transferred. And if you know how to balance those investments, that's the most important thing. Be in a safe, well-balanced portfolio. You can reduce your risk without reducing your return," he said.

Dalio's comments come as the U.S. stock market suffered losses after Federal Reserve Chair Jerome Powell talked about accelerating tapering of asset purchases in light of problematic inflation. 

On Tuesday, Powell told the U.S. Senate that the U.S. central bank would be considering wrapping up tapering a few months earlier.

"At our next meeting, it is appropriate for us to discuss whether to wrap up our asset purchases a few months earlier," he said. "We've seen elevated inflation pressures, strong labor market data, strong spending data. Every dollar of asset purchases does increase accommodation. The U.S. economy is strong and inflationary pressures are high."

Powell also stated it is best to drop the term "inflation is transitory," adding that the risk of more persistent inflation is higher.

"The threat of persistently higher inflation has grown. We will use our tools to make sure higher inflation will not become entrenched. We can now see higher inflation persisting through to the middle of next year," he noted.

What the Fed failed to anticipate when it comes to inflation is the supply issues, the Fed Chair added. "We didn't predict the supply-side problems. That's what we missed," he said.

Gold price sheds gains as Powell talks more aggressive tapering, wants to drop 'inflation is transitory' term

In response to Powell's hawkish comments, the Dow Jones Industrial Average dropped 625 points, the S&P 500 was down 1.7% and the Nasdaq fell 1.3%. In an immediate reaction, gold also gave up its earlier gains, falling from the daily high of $1,811.40 to a low of $1,771.20, down $40. At the time of writing, December Comex gold futures were trading at $1,770.80, down 0.65% on the day.

Analysts are pricing in more market volatility as December trading begins tomorrow.

"The reality is hotter inflation coupled with a strong economic backdrop could end the Fed's bond-buying program as early as the first quarter of next year. Ultimately, the transitory view on inflation has officially come to an end as Powell's comments reinforced the notion that elevated prices are likely to persist well into next year. With potential changes in policy on the horizon, market participants should expect additional market volatility in this uncharted territory," said Charlie Ripley, senior investment strategist at Allianz Investment Management.

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