Ray Dalio: With Two Potential Crises, Buy Gold In Case "Things Go Badly"

It's been a while, years in fact, but suddenly it's gold's time to shine again.

The yellow metal - insurance against systemic collapse, hyperinflation and infinite political stupidity - which in recent years has seen its popularity fade as the younger generation has gravitated toward the far faster moving crypto currencies - is once again back in the spotlight.

As UBS' strategist Joni Teves, who has been recommending the precious metal for a long time despite the BOJ's relentless suppression, writes "gold bounces from recent lows in line with other safe havens amid risk-off sentiment across markets following geopolitical headlines over the past 24 hours." Below are the key considerations from today's UBS note:

Key technical levels come into focus for gold, triggering some decent market activity in the middle of this typically quieter summer period. Geopolitical risks tend to have quite a volatile influence on prices and the immediate risk here is that $20 move from yesterday is quickly faded. Gold is holding well so far. We think the risks are somewhat skewed to the upside here, with a break of $1280 likely to attract further attention. Although speculative positions on Comex have increased in the past couple of weeks, overall levels remain lean. Subdued participation this year and lean positioning suggests that market participants would have to play catch-up on a break higher. On the flip side, this also suggests that a pullback is likely to be relatively contained. Additionally, we had previously argued that uncertainty on Fed policy expectations is likely to keep gold broadly supported, especially given downside risks to inflation. US CPI data on Friday should offer some insights; the next important signpost would be the Fed's Economic Symposium at Jackson Hole, for further guidance on policy.

Separately, 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."

Comments

Mementoil tmosley Thu, 08/10/2017 - 13:16 Permalink

I don't know if you are serious about that prediction or just saying that half jokingly.But you should consider that the current price of gold is not far from the cost of production, and if its price declines any further, all the mining companies will go out of business and there simply won't be any new supply.What do you think this will do to the price of gold?

In reply to by tmosley

eclectic syncretist Mementoil Thu, 08/10/2017 - 13:44 Permalink

The price of gold will continue to reflect the slow realization by the populace that the banksters lies about what our economy is truly is based upon are indeed, deliberate lies, and that the almighty dollar and other bits of paper and eidolons in cyber space are nothing more than ephemeral dreams that will one day be wiped from human consciousness, quite violently if we let the banksters determine the outcome.. 

In reply to by Mementoil

0valueleft tmosley Thu, 08/10/2017 - 13:46 Permalink

Sorry dummie, gold now has another liability to underwrite, cryptos. It is and always will be insurance for all the paper and digital assets, equities, currencies and general stupidity.I know your butthurt, because you used to pump silver as a paradigm shifting investment and now your friends and family who bought into that pitch at $40-49 silver find it abhoring to listen to you about BTC. Just tell them your sorry and that it's real function is a hedge agaisn't ridiculous speculative behavior. Anyone with eyeballs and ears should be able to see the trading oppurtunity cryptos is offering. Is it going to change the world? You don't have any fucking honest idea, nobody does. It's potential to do so is what drew me to it, but human nature based in fear and greed has now raised some doubt. Healthy doubtOr learn nothing from the past, beg borrow, steal, and buy/hold your new certainty with strong hands as weak hands plow marginal money into your sure thing. Yeah, insurance is a horrible idea an antiquated concept held close by old stupid people. Facsinated by your ignorance of history as much as I'm fustrated with my ability to adopt the future, but at least I'm trying.BTC blow off top is going to be epic, just don't try to time the tip.

In reply to by tmosley

fbazzrea VD (not verified) Thu, 08/10/2017 - 14:07 Permalink

BTC supporters/speculators might want to take a gander at these two videos (in order):The Global Unit of Account is now shifting from the USD to the SDR https://www.youtube.com/watch?v=SYPsygSHnAs------------------------"The new Chinese-created ACChain crypto currency blockchain will be the SDR-related world currency that will allow the international banking elite to digitize every tangible asset on earth, and they will then exert total control over all of it."https://youtu.be/sG3Ju8AhCKMimplicates Bitcoin and suggests the IMF's global currency crypto will ultimately replace BTC.

In reply to by VD (not verified)

shizzledizzle Thu, 08/10/2017 - 12:44 Permalink

Didn't you get the memo Ray? You are supposed to mortgage your house and pile into crypto now. That barbarous relic you speak of is a thing of the past! </s> 

activepatriot Thu, 08/10/2017 - 12:51 Permalink

Buying gold is stupid if you have debt.  Pay down ypur debt first so you are less vulnerable to a loss of income.  Then buy things you need that maintain value.  Then buy meams to protect what you have.   

ogretown activepatriot Thu, 08/10/2017 - 14:58 Permalink

Sounds like good advice. I bought my first two gold coins in 1977 and continue to add to my stack until 2014. Started adding junk silver and then silver coins to the mix in 1987.  All through the years I shunned debt.  Bought cars and motorcycles with cash, grudgingly bought a house that needed a small mortgage..but paid it off in record time. All the while my contemporaries were leveraging out and had better cars, larger homes, etc. I continue to owe nothing to anyone, pay off my credit cards on the dot to avoid interest payments.  There is of course a lesson here, but not one the bankers would encourage - buy what you can afford to buy, shun debt and be clear headed enough to remember that each and every piece of fiat currency ever deviced by man has wound up going to zero.  

In reply to by activepatriot

Apostle of Unknown anarchitect Thu, 08/10/2017 - 14:32 Permalink

True. You never know :-) But on the plus side, 80% or so of platinum is mined (mostly at a loss) in South Africa, which is not exactly a stable country. And there's always the chance that Mr Market is running ahead of itself in seeing a near future of all electrical vehicles, or that it is underestimating fuel cells. And mostly, platinum and gold just really move together.

In reply to by anarchitect

Dragon HAwk Thu, 08/10/2017 - 12:52 Permalink

Yeah more big names need to start using the Term Paper Gold. in a derogatory form of course.  as In  My Daughter brought home some paper Gold, what a loser.

meterman Thu, 08/10/2017 - 12:55 Permalink

"Never let a good crisis go to waste": This from Ray Dalio and UBS' strategist Joni Teves ( borrowed from a communist Chicago politician. 

tropicthunder Thu, 08/10/2017 - 12:53 Permalink

Markets getting whacked today, threat of Thermonuclear war and all gold can muster up is a measly $8 gain?Not to mention gold stocks not even able to break above any meaningful resistance from the last decline.All the while BTC is getting ready to blast out over $3500 today.. So with that, I will give a much shout to FUCK GOLD

Latitude25 (not verified) Thu, 08/10/2017 - 13:03 Permalink

Yeah.  Buy paper gold on margin and wait for the next bullion bank smackdown.  What could go wrong?

BlueGreen Thu, 08/10/2017 - 13:11 Permalink

I always liked a kilo of palladium.  Save hunting down catalytic converters if your setting up a catalyzation reaction for whatever.. (good for cracking petrol, and speeding reactions of other organo based compounds- like drug manufacture PATS etc)