When you manage $160 billion, you have to know how to manage risk exposure. Just ask Ray Dalio.
Ray Dalio is not only the manager of the largest hedge fund in the world, Bridgewater, but also one of the world’s top 100 richest people. That’s why the press took notice when he recently increased his fund’s gold exposure during the third quarter of 2017, according to public filings.
His opinion is no secret, however. Dalio has been on a press tour promoting the Bridgewater management philosophy of radical transparency in his recently published book, “Principles.”
Dalio hasn’t been shy to warn investors about the troubled times he sees ahead.
In a recent blog post titled “Risks Are Rising While Low Risks Are Discounted,” Dalio explained that:
1.Corporations have become overleveraged because interest rates are low relative to many companies’ projected return on equity.
2. Investors are simply too complacent after 9 years of gains in stocks
Dalio is a shrewd practitioner of diversification in his goal to not be overly exposed to any particular economic outcomes and is quite bullish on gold.
Dalio thinks that if things go badly in the markets, gold (more than currencies or assets like the dollar, yen, and U.S. Treasuries) stand to benefit.
CITI SAYS CONSTANT GEOPOLITICAL RISK IS OUR“NEW NORMAL”
Dalio is not alone in his positive outlook for gold. Citi has said that we are now in a period where the “new normal” is heightened geopolitical risk and $1,370 per ounce for gold prices could be ahead.
This isn’t just the recent news scary headlines. Citi analysts has issued a report saying that the geopolitical case for gold actually appears stronger to the bank than at any other point over the last four decades. The key issues they cite as drivers include the changing face of American politics and elections nationwide, military saber rattling and potential macroeconomic crises that loom ahead.
Commodities expert Dennis Gartman predicts gold will rise to $1,400 an ounce in 2018 and warns that easy central bank policies have weakened major currencies like the dollar and the euro. Gartman favors gold as a long-term core holding.
FLATTENING BOND-YIELD CURVES COULD HELP GOLD
With proposed Republican-led tax reform dominating the headlines, gold investors should pay more attention to flattening bond-yield curves. Some analysts believe that they could be adding key support to gold prices.
The yield-curve, the difference between short-term and long-term bonds, has recently tested record levels. TDS Securities head of commodity strategy Bart Melek reports that the aggregated yield curve, TDS’ preferred measure, is at or near multi-year lows. As a result, he thinks gold will remain well supported in the near term.
Ronald-Peter Stoeferle, fund manager at Incrementum AG, is also watching the yield curve and agrees that its flattening is good for gold. Stoeferle thinks the trend in the yield curve indicates that the economy is not doing as well as it appears and investors will continue quietly moving into gold as uncertainty rises. Lukman Otunuga, research analyst at FXTM, also see the falling yield curve supporting gold’s safe-haven demand.
ETF Securities director of investment strategy Maxwell Gold says a flatter yield curve could create additional volatility in the stock market, increasing gold’s allure as a safe-haven asset.
Will the yield curve change anytime soon? Maxwell Gold believes the long-end of the curve will remain constrained as the Fed pursues its “lower for longer” interest rate policy.
DOUBTS ABOUT TAX REFORM? YOU’RE NOT ALONE
Gold experts have been watching how gold prices have reacted to any U.S. dollar softening due to uncertainty about tax reform ahead. The proposed overhaul of the U.S. tax code would be the biggest since the 1980s, and any hint of failure could send shockwaves through a stock market that has already priced in full success.
Bart Malek thinks the tax plan being considered in Congress would inflate the nation’s budget deficit and expand the debt. That deterioration in the nation’s fiscal standing is a recipe for higher silver and gold prices, he said.
Malek expects gold prices could advance more than 7 percent by the end of next year to $1,360 an ounce, as investors seek outprecious metals as a hedge against uncertainty. In particular, he cites U.S. political drama and geopolitical tensions with North Korea as his biggest concerns.
BMO Capital Markets’ head of base precious metals trading, Tai Wong, believes tax reform in Congress is in serious doubt. In addition, he notes that the Alabama Senate race could narrow the already wafer-thin GOP majority. Wong thinks sentiment is turning against the U.S. dollar, which could lift gold prices to over $1,300 an ounce soon.
Jonathan Butler, commodities analyst at Mitsubushi, says the equity market rally is exhausted and that could support gold prices ahead.
IGNORE THE HEADLINES AND FOCUS ON YOUR FUTURE
Nobody likes to read headlines that talk about war with Korea, potential stalling of tax reform and a possible market decline. While it can be hard to look away, it can also make it hard to take action.
Professional investors like Ray Dalio sleep well at night because they have a game plan in place that will help them, no matter what conditions might arise. Diversification is the cornerstone of that plan and well worth considering even if you don’t have $160 billion and thousands of investors in your care.
No one likes to contemplate war or economic or political turmoil, but what protection does your paper-based portfolio have if the unthinkable were to occur?