What the Worlds Most Powerful Hedge Fund Manager Thinks about Gold

May 19 2015

Ray Dalio of Bridgewater Associates manages 170 billion dollars, and is called the world’s 'most profitable' fund manager. He started small; he was just 12 years old when he earned $300 as a caddy in his free time. He then bought his first stock: Northeast Airlines.

What the Worlds Most Powerful Hedge Fund Manager Thinks about Gold

Ray Dalio of Bridgewater Associates manages 170 billion dollars, and is called the world’s 'most profitable' fund manager. He started small; he was just 12 years old when he earned $300 as a caddy in his free time. He then bought his first stock: Northeast Airlines. Dalio quickly learned the art of investing. Forty-five years later he has grown to be the world’s most powerful hedge funds manager. No other hedge fund has as much assets under management as Ray Dalio’s Bridgewater does. What does he have to say about gold?

Ray Dalio’s "All Weather" Fund

Early in his life, in 1971, Ray Dalio saw the consequences of the abandonment of the gold standard first-hand. While he made his living as a broker on the New York Stock Exchange, Nixon announced the end of the gold standard. The next day was chaotic; the gold price increased by 4% in one single day, which was dubbed the 'Nixon-rally.'

What he learned that day was that an investor should be prepared for everything.

He asked himself a simple question: “how can I construct an investment portfolio that will perform well under all circumstances, be it a devaluation or any other kind of unforeseen scenario?”

This was the start of the 'All Weather' portfolio. Initially it was Ray Dalio’s personal investment strategy, but later it became an essential part of Bridgewater.

What Does the "All Weather" Portfolio Consist Of?

An important cornerstone of this portfolio —resistant against 'all weather conditions' — is gold.

"Gold is a currency," says Dalio.

But, there is a problem. Or well, at least for Ray Dalio and his portfolio because he, unlike us, is managing billions of dollars. When he buys too much gold, it has a significant influence on the gold price. He would be buying so much gold that the price would increase merely on the strength of his orders.  

This week, Dalio mentioned in an interview that "gold should be a portion of everyone's portfolio to some degree because it diversifies the portfolio. It is the alternative money."

Dalio was asked if he owned any gold himself. His answer – "Oh, yeah" – was telling.

"There's no sensible reason not to have some (gold), other than you don't know history and you don't know the economics of it."

According to Dalio, we should consider gold as an alternative for cash, for your savings. A part of your portfolio should consist of gold, and for investors with more modestly-sized portfolios like us, it should probably be a larger share of our portfolio than the Bridgewater fund.

This Week’s Surprise

Ray Dalio’s investment philosophy includes the idea that there is a constant flow of surprises in the wonderful world of investments. This week, the market was faced with a surprise again.  

As a reader of this newsletter, you knew that the U.S. economic growth would be a disappointment. But after this was confirmed by GDP growth (+0.2%) data, the market simply shrugged its shoulders.

However, that’s beginning to change. By now, people are realizing that the U.S. economic recovery is stagnating. The day before yesterday, U.S. retail sales data were published. Everyone expected an enormous recovery, but the opposite was true. 

Retail sales are at recession levels, while analysts predicted sales would be much higher due to a lower oil price. Nothing could be further from the truth, and the gold price increased by $30 per troy ounce in just a couple of hours.

By now, the gold price has once again surpassed the magical $1.200/oz threshold.

World Gold Council: Investors’ Sentiment Is Improving

The World Gold Council also published its quarterly report on the gold market.

The most important conclusion is that investors’ sentiment in gold has improved for the first time since Q4 2012. Or at least, if we rely on the growth in the assets held by the most important gold ETFs.

These gold funds — which try to track the gold price and are listed on the U.S. and European exchanges —saw their gold holdings increase for the first time since 2012. Their gold reserves increased with 26 ton last quarter.

A Greater Awareness of the Weakening Recovery = a Higher Gold Price

The weakening economic recovery is of course not directly responsible for the gold price having once again surpassed the $1.200/oz level. The market expects that the Fed will postpone the interest rate hike it had scheduled this June after the recent disappointing economic data.

The more people will become aware of this situation in the coming weeks, the more the gold price will rise. That’s why the market anxiously waits for any clue from the Fed that it may raise interest rates (or postpone this). The tension will continue in the coming two weeks and will positively, or negatively, influence the gold price.

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