Dalio: gold’s time as insurance is now

by Chris Becker

Gold isn’t money or currency. Its main use is as jewellery. Because its shiny.

Shiny things sell.

Outside vanity, its real utility is in specialist industrial applications particularly electronics, but also optics and space based applications.

But that ignores its historical “value” whereby like a lot of other institutions, its worth is determined by what it used to or may have represented. Gold did not always have the a linear run as currency in history – there were many gaps where paper or other instruments, including its “poor” cousin, silver = were the “dollars” of their times.

This anchoring of worth in the present transposed against the reality of modern monetary methods, i.e the creation of money by private banks and a reserve banking system, means that in times of crisis its value can soar.

Thus, nearly half of all gold produced is done so for insurance purposes. Its called investment, but really, its an insurance policy against this particular phase of using virtual credit, which we call money.

I’ve long called for a physical hedge of no more than around 5% of a portfolio’s worth in gold, alongside other insurance measures like life/trauma/TPD insurance and not being hugely in debt (i.e keep your LVR below 50% at all times).
Ray Dalio of famed hedge fund Bridgewater has a similar construction view, but has recently called for a larger allocation given the recent rise in risk.  More from ZH:

…in an unexpected endorsement from the head of the world’s biggest hedge fund (excluding apple), overnight Ray Dalio said that clients should move 5% to 10% of their capital to gold as a hedge to the two biggest risk events unfolding today: the rapidly escalating North Korea crisis, and the seemingly intractible debt ceiling crisis, which as former CBO director Rudy Penner said yesterday, would likely lead to a market crash this fall. Here are the highlights which Dalio posted on his LInkedIn page:

… People adapt to the circumstances they have experienced and are then surprised when the future is different than the past. In other words, most people are inclined to assume that the circumstances they have recently encountered will persist, which leads them to change what they are doing to be consistent with that recently experienced environment. For example, low-volatility periods in which credit is readily available tend to lead people to assume that it’s safe to borrow more, which leads them to lever up their positions, which contributes to greater volatility and hurts them when things change.

That appears to be the case now—i.e., prospective risks are now rising and do not appear appropriately priced in because of a) a backward looking at risk and b) corporate leveraging up has been high because interest rates are low relative to many companies’ projected ROEs and because past risks have been low. The emerging risks appear more political than economic, which makes them especially challenging to price in. Most immediately, during the calm of the August vacation season, we are seeing 1) two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war, and 2) the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising. It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities.

When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on.

We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest you relook at this. Don’t let traditional biases, rather than an excellent analysis, stand in the way of you doing this.

And in a surprisingly humble conclusion, Dalio then says the following: “if you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you sharing it with us.


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