Look Who’s Talking Up Gold Now

  • Ray Dalio on the right asset for a “paradigm shift”
  • Why the Midas metal is “risk-reducing and return-enhancing”
  • Stocks slip, Netflix nuked, leading indicators lagging
  • Russia warms to Europe’s de-dollarization gambit
  • Private vs. public pensions… legal and illegal vs. right and wrong… the biggest problem with self-driving vehicles… and more!

The founder of the world’s biggest hedge fund just gave his blessing to the Midas metal.

Bill Watts Tweet

Yesterday, Ray Dalio of Bridgewater Associates posted a loooong essay at LinkedIn — the upshot of which is that “it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

By the end of the day’s Comex trading, gold notched its highest finish since May 14, 2013.

Chances are you’ve heard of Ray Dalio and you know he’s a huge success. But you might not have a sense of how huge.

For one thing, while Bridgewater manages $125 billion, it’s been closed to new investors for years. When it was still open, however, you couldn’t get in unless you had a minimum net worth of $5 billion and you were willing to part with a minimum investment of $100 million.

Bridgewater’s Pure Alpha fund, launched in 1991, generated 21% compounded annual returns (before fees) as of 2014. (That’s the most recent figure we could track down on the fly this morning. That’s how exclusive a club Bridgewater is.)

In other words, across a 23-year span, a $100,000 investment turned into $8 million.

Not bad for a kid from Queens who got his start in the late ’50s picking up stock tips as a golf caddy…

Dalio’s case for gold comes down to this: We’re more than a decade beyond the Panic of 2008, and the rules of the investing game are changing radically.

That is, he thinks we’re going through a paradigm shift — a term popularized in the ’60s by the physicist and philosopher Thomas Kuhn.

Under the ruling paradigm of the last 10 years, prices of financial assets took off (especially stocks) — growing at a much faster clip than the economy.

That’s about to change, Dalio believes: “In paradigm shifts, most people get caught overextended doing something overly popular and get really hurt,” he writes. “On the other hand, if you’re astute enough to understand these shifts, you can navigate them well or at least protect yourself against them.”

Here’s why Dalio sees a paradigm shift coming. Read closely and you’ll see his reasoning touches on themes we’ve been addressing in these virtual pages for years now.

“I think that it is highly likely that sometime in the next few years, 1) central banks will run out of stimulant to boost the markets and the economy when the economy is weak and 2) there will be an enormous amount of debt and nondebt liabilities (e.g., pension and health care) that will increasingly be coming due and won’t be able to be funded with assets.

“Said differently, I think that the paradigm that we are in will most likely end when a) real interest rate returns are pushed so low that investors holding the debt won’t want to hold it and will start to move to something they think is better and b) simultaneously, the large need for money to fund liabilities will contribute to the ‘big squeeze.’

“At that point, there won’t be enough money to meet the needs for it, so there will have to be some combination of large deficits that are monetized, currency depreciations and large tax increases, and these circumstances will likely increase the conflicts between the capitalist haves and the socialist have-nots.

“Most likely, during this time, holders of debt will receive very low or negative nominal and real returns in currencies that are weakening, which will de facto be a wealth tax.”

In that environment — debt being monetized, currency being depreciated — gold is a safe haven.

Certainly that’s the case relative to other assets like stocks. “I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold,” writes Dalio.

That’s the case for gold as “risk-reducing and return-enhancing.”

For our purposes today, his reasoning doesn’t matter as much as the fact it’s Ray Freakin’ Dalio who’s saying it. Coming from him, big-picture pronouncements like these tend to become a self-fulfilling prophecy.

And at a pivotal moment, too, when gold is breaking out of a six-year funk. We shared an eye-opening gold chart on Friday, but this one today, courtesy of colleague Greg Guenthner, is even more revealing…

Bustin' Loose Chart

To be clear, Dalio isn’t certain about the timing. But he’s supremely confident the paradigm shift is coming. If you don’t have a gold position in your portfolio, now might be the ideal time to act.

How? We’ll put in another good word today for the Hard Assets Alliance. If you’re a newbie to gold — or if you’ve tried online dealers in the past and you’ve been put off by the complexity — there’s no easier way to buy and hold real physical metal, and at exceptionally low cost.

If you prefer, with a single click you can buy and store your metal in your choice of seven audited vaults worldwide.

You can follow this link to set up an account. No need to put money in the account if you’re not ready yet. And whether you’re ready or not, we’ll send you six free bonus reports — including Jim Rickards’ Perfect Gold Portfolio.

Note that Agora Financial recently purchased a stake in the Hard Assets Alliance, so yes, we’ll get a cut of the fees (which are among the industry’s lowest). We wouldn’t have made that investment, however, if we weren’t already impressed by what Hard Assets Alliance does for everyday folks who want exposure to precious metals. One more time, here’s the link.

For a second straight day, earnings season has bummed the junior staff manning Wall Street’s trading desks in the summertime.

At last check the Dow has shed 100 points, just as happened yesterday. The S&P 500 is now 25 points below that nice round number of 3,000.

Gold is inching still higher at $1,426. But crude is falling hard for no obvious reason (as seems to be happening a lot lately) at $55.17, close to a one-month low.

The company whose quarterly numbers are generating the most buzz is Netflix — down 11% as we write because its U.S. subscriber count fell.

As if that should be a surprise — pretty much anyone in America who’s ever been inclined to try out Netflix has done so by now, right?

Either NFLX’s drop today is a massive overreaction (and it’s time to buy)… or it was preposterous that people were buying NFLX at nosebleed levels to begin with (and it’s set to fall further). No way are we taking either side of that bet!

The big economic number of the day is a rude surprise — the Conference Board’s index of leading economic indicators tumbling 0.3% in June.

The big drags on the number were housing permits (noted here yesterday)… new factory orders… and a stubbornly “inverted yield curve” in which short-term Treasury rates are actually higher than long-term rates. (If you’re not familiar with the phenomenon, here’s a short refresher we did in March.)

On the “de-dollarization” watch, Russia is ready to join forces with the European Union to dodge Washington’s sanctions on Iran.

Under those sanctions, Iranian banks are effectively barred from SWIFT, the global clearing house for cross-border financial transactions. Earlier this year, Germany, France and the U.K. set up an alternative clearing house called INSTEX — specifically for transactions with Iran.

Russia says it’s game. “This is an important project,” says Dmitry Peskov, spokesman for President Vladimir Putin.

Treasury Secretary Steve Mnuchin — gathered in Paris this week with his fellow G7 finance ministers — is not amused. “If you want to participate in the dollar system, you abide by U.S. sanctions.”

Significantly he said that after meeting with his French counterpart Bruno Le Maire — the guy who last year chafed against Washington acting as “the economic policeman of the planet.”

This is a yearslong showdown (although we saw the outlines of it taking shape as far back as 2014)… and it’s only beginning.

“Loved your warning about future private pension bailouts,” a reader writes after yesterday’s 5.

“If the politicians decide the government needs to bailout private pensions, why stop there? An even bigger issue exists with underfunded public pensions. Please keep us posted.”

The 5: Oh, it’s a looming issue alright. The topic’s been on our radar since 2011. We’ll have an update next week.

After a reader accused us of “siding with the criminals” by putting in a good word for the late Eric Garner, a couple of other readers rose to our defense.

“Seriously?” says one. “Wow, talk about walking around with blinders on!

“Just because someone else tells you it’s ‘illegal’ to do something doesn’t mean it’s wrong. Feel free to kowtow to your so-called ‘superiors,’ but please don’t expect the rest of us to blithely accept deplorable behavior from them.

“And if refusing to stop selling cigarettes ‘illegally’ DESERVES an execution (you know, because it’s illegal), then I’d say the officer who ILLEGALLY killed Eric Garner should be punished as well.

“Of course, murder isn’t anywhere near as bad as selling cigarettes illegally, so maybe some form of community service or something. We wouldn’t want the poor officer to suffer too long now, would we? He was just doing his job! (Illegally.)”

And this from a Platinum Reserve member: “Let me share a quote from the novel Oath of Fealty by Larry Niven and Jerry Pournelle: ‘Nobody but a lawyer can tell legal from illegal, and the lawyers can’t tell right from wrong.’

“Point being, anyone who thinks that legal and illegal equate perfectly with right and wrong needs more personal experience with the system.”

“Ever watch Highway to Hell or something similar?” a reader writes after the topic of driverless vehicles came up yesterday.

“I am trying to imagine a driverless truck chaining itself up and navigating through an icy mountain pass.”

The 5: When we first started musing about driverless vehicles three summers ago, winter weather was the primary objection readers raised. Three years on, that turns out to be the biggest issue the programmers and engineers are facing.

As we understand it, the cameras and sensors in driverless vehicles are extremely dependent on highway markings. If those markings are obscured by snow or ice, that’s a problem.

We can also imagine it would be a problem if highway budgets are stretched and they just haven’t gotten around to repainting in a while. (Or so it occurs to your editor, living in a place where highway budgets are stretched…)

Best regards,

David Gonigam

Dave Gonigam
The 5 Min. Forecast

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Dave Gonigam

Dave Gonigam

Dave Gonigam has been managing editor of The 5 Min. Forecast since September 2010. Before joining the research and writing team at Agora Financial in 2007, he worked for 20 years as an Emmy award-winning television news producer.

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