(Kitco News) Gold will increase in value while the U.S. dollar drops, said Paulson & Co. founder John A. Paulson. And that is the hedge fund manager's outlook for this year, the next three years, and the next five years.
"There has been a significant increase in demand from central banks to replace dollars with gold, and we're just at the beginning of that trend. Gold will go up and the dollar will go down, so you'd be better off keeping your investment reserves in gold at this point," Paulson told journalist Alain Elkann in an interview.
With gold, Paulson sees the potential for appreciation and recommends playing the long game. He highlighted the de-dollarization trend and noted that with sticky inflation fears and new geopolitical tensions, gold is attracting new investors.
"The dollar is still very dominant in terms of reserves and trade, but the U.S. post-WW2 economy is not quite the powerhouse it was," Paulson said. "Other countries do not want to rely on the dollar as much as they have in the past, and the U.S. also has an enormous deficit with the rest of the world in terms of trade and investment balances that used to be very positive, but now it's very negative."
The U.S. dollar is also looking at depreciation versus other currencies, Paulson said, pointing to massive money printing, fiscal spending, previous quantitative easing, and inflation.
"If you had dollars and 9% inflation, this year you lost 9% of your money; interest rates were nowhere close to compensating for that loss. That is driving investors and central banks around the world to look for an alternative reserve currency, and gold is rising again," he stated.
Gold represents a legitimate alternative to the greenback and other fiat money. And with the growing fear of sanctions, countries like China recognize that USD reserves can be frozen.
"If you keep your money in fiat currencies, you face the risk, due to geopolitical events, that your reserves can be seized. As the central banks did with Russia. China probably thinks that as they have so much of their reserves in dollars, if they get into a geopolitical spat with the Western world over Taiwan or something else, there is a possibility these reserves will be frozen, like they did with Russia," Paulson pointed out.
With physical gold, there is no such risk, plus there is a very good likelihood that the precious metal reserves will go up in price, the billionaire noted.
"We're at the beginning of trends that are going to increase the demand for gold, and inflation and geopolitical tensions will determine the rate at which gold increases. This year gold will appreciate versus the dollar, and also over a three, five, and ten-year basis," he said.
When asked about the Federal Reserve, Paulson said that the U.S. central bank could hike another 50-100 basis points before pausing.
"Many people are expecting that the Fed will start easing in the second half of the year, but inflation will be more persistent than the markets currently perceive. They'll likely raise it another 50, 75, 100 basis points over the next few meetings and then hold it there until we get a severe economic shock," he said.
Paulson called cryptocurrencies "the biggest bubble" that the Fed created through massive money printing. "Crypto is one of the most ridiculous investment vehicles ever created," he said.
The prominent investor said there is no intrinsic value and projected that the crypto market would lose its remaining value in the next 48 months. "The cryptocurrency from its peak lost 70 to 75% of its value, and over the next two years, I think it will lose most of the remaining value. It's very unfortunate that so many people have lost so much money investing in crypto," he said.
