Legendary Fund Manager Ray Dalio | Buying Gold or Bitcoin?

Part of the transcript (too many words to include everything in the description):

Roughly every 10 years, the world changes dramatically.

“Identify the paradigm you’re in, examine if and how it is unsustainable, and visualize how the paradigm shift will transpire when that which is unsustainable stops.”

As an investor, one of the biggest mistakes to make is to assume that these paradigms will continue endlessly.

Interestingly, paradigms typically last for approximately a decade. Nearing the end of each decade, we often see a big economic swing. In 2019, we could be coming to the end of our current paradigm.

What should we expect over the next couple of years? To answer this, we must consider what the main forces for our current paradigm have been since 2009.

2 terms come to mind:

- Low interest rates
- Quantitative easing

Quantitative Easing

Quantitative easing is a fancy way of saying “printing money”.

Quantitative easing involves central banks creating new money out of thin air, which is then used to purchase assets - typically government bonds - from businesses.

The result? A further increased stimulus for the economy.

As interest rates are at global lows, many central banks can’t drop them further. In fact, some countries - namely Switzerland, Denmark, Sweden and Japan - already have negative interest rates.

This could be seen as indication of an unsustainable force.

How about quantitative easing?

Quantitative easing - or “money printing” has had a strong stimulative effect since 2009. However, it has had diminishing effects over time. Further, attempts to employ ‘quantitative tightening’ - the reverse of quantitative easing - have caused taper tantrums in the markets.

Monetary policy generally shifts back and forth between two modes:

- Helping borrowers at the expense of the lenders by keeping interest rates lows

- Helping lenders at the expense of borrowers through raising interest rates

By asking who the central bank needs to help most, and what tools they have at their disposal, we can determine what forces are likely to drive the next paradigm shift.

For Ray Dalio, “it seems obvious that they have to help debtors [borrowers] relative to the creditors” [lenders].

In normal economic times, this would mean:

- Lowering interest rates
- Increased quantitative easing

However, both of these have become less effective, offering diminished returns over times. What other policies are therefore likely?

Dalio believes “that monetisations of debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors”

In other words, by reducing the value of fiat currencies and making lending less and less attractive, investors will look to more risky investments, thus providing an economic stimulus.

The big question then is, which investments will perform well?

“Those that will likely do best will be those [investments] that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold”.

Dalio adds “I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one’s portfolio.”

Dalio settles on the conclusion that the majority of traditional investments - such as stocks, bonds, and holding cash - look likely to have poor returns in the coming years.

Instead, he highlights gold - an asset which has long been considered as a hedge against traditional markets.

As the emergence of decentralised technology grows, Cryptocurrencies such as Bitcoin have been thrust into the public eye.

Due to its inherent decentralisation and mathematically limited supply, Bitcoin cannot be influenced or printed by governments. With this, Bitcoin has been described by many as - like gold - a hedge against traditional markets.

Bullish signs.

A word of warning for all Bitcoin holders out there - Bitcoin isn’t yet accepted as a hedge by all. Many still view it as only as a speculative investment.

While the Bitcoin community often argue with ‘gold fanatics’ stating that “Bitco