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Veteran asset manager Ray Dalio has advised investors to allocate at least 15% of their portfolios to gold and Bitcoin, amid increasing risks in bond and equity markets.
Speaking on The Master Investor Podcast, the Bridgewater Associates founder argued that macroeconomic risks concerning rising government debts—in the U.S. and elsewhere—have not been priced into markets, which may eventually face a significant fall.
The U.S. Government is "is spending 40% more than it takes in, and it can’t really cut its spending," Dalio said, adding that, "it’s accumulated a debt that’s six times the amount of money it takes in [...] and in interest payments that is $1 trillion per year, which is half [its] budget deficit.”
Dalio also went on to explain that the U.S. Government can pay its debts only by issuing more debt, and by “the central bank [the Federal Reserve] printing the money.”
This has created a situation where markets may become increasingly spooked, with Dalio suggesting that a trigger for a big crash could be another significant round of quantitative easing, or the Government taking control of the Federal Reserve.
Signals of such events are beginning to “flash or flicker,” according to Dalio, who also makes similar arguments in his recently published book, "How Countries Go Broke."
Gold and Bitcoin
Because such risks are not priced into markets, Dalio is advising investors to allocate at least 15% of their portfolios to gold or Bitcoin, which could serve as hedges against fiat currencies and cash equivalents (such as bonds).
The investor suggested that he is “strongly preferring” gold over Bitcoin, adding that he doubts any central bank would take the cryptocurrency on as a reserve currency, “because everybody can understand and watch who is doing what transactions on it, so there’s no privacy to it.”
Dalio also argued that there are “doubts” over whether “the code can be broken” or whether Bitcoin’s protocol could ever be changed to make it “less effective” as a store of value.
Given these concerns, the veteran asset manager explained that gold outweighs Bitcoin in his portfolio, saying, “I have gold and I have some Bitcoin, but not much.”
Such caution regarding Bitcoin is a common sentiment among more conventional investors and investment advisors, with AJ Bell’s Head of Investment Analysis, Laith Khalaf, telling Decrypt that investing in BTC in the face of economic fears is akin to “jumping out of the frying pan and into a red hot fiery pit.”
While Khalaf affirmed that investing in Bitcoin is “fine” if investors are allocating only small portions of money they’re prepared to lose, he also argued that gold—which can also be volatile—is a “more solid anchor” in the face of potential risk.
“Gold is a much preferable diversifier to Bitcoin, as it tends to increase in price when risk aversion is high,” he said. “It can be a useful insurance policy for a portfolio, but importantly held alongside shares and bonds to achieve a balance of risk and reward.”
On other hand, some experts highlight that gold can carry more risk than often advertised, with cryptocurrency analyst and author Glen Goodman telling Decrypt that certain periods of history were difficult for the metal.
“There's no denying Bitcoin's price volatility, but let's not forget anybody who bought gold during the inflation crisis of 1980 and held it for twenty years lost 85% of their money in real terms during that period,” he says. “Gold didn't start recovering until the turn of the millennium.”