On the topic of investing in gold, billionaire investor Ray Dalio said something very interesting:
“If you don’t own gold, there is no sensible reason other than you don’t know history or you don’t know the economics of it.”
What he meant was that gold is an alternative to cash. Under today’s fiat money system, a lot of central banks are printing massive amounts of money. With paper money flooding our economy, a monetary crisis is in the loom. In situations like this, holding gold is a better alternative to holding cash.
Not everyone shared his view. For example, billionaire investor Warren Buffett believed that gold was of no use and hence had no value. In response to Buffett’s view, Dalio said:
“I think he’s making a big mistake. Money can be produced. Gold is somewhat limited. Gold is an alternative that should be a part of everyone’s portfolio but not in a big way. ”
Dalio’s investment strategy reflects his bullish view on gold. Inside his hedge fund Bridgewater Associates, he owns Barrick Gold Corporation (NYSE:ABX), Goldcorp Inc. (NYSE:GG), and Silver Wheaton Corp. (NYSE:SLW).
There’s a Better Way to Preserve Wealth than Paper Money
The reality is; central banks around the world have printed an unprecedented amount of money. The U.S. Federal Reserve has increased money supply by 67%, or more than $5.0 trillion, since 2008. The European Central Bank (ECB) also joined the game, starting its 1.1 trillion euro quantitative easing program earlier this year.
The massive money printing is going to have two main consequences.
First, quantitative easing programs pumped a lot of money in asset markets. As a result, the stock market and the bond market have become extremely bloated.
Second, once the massive amount of printed money enters the real economy, inflation is going to shoot through the roof.
Elevated levels in the stock market and the bond market won’t last long. Once markets crash and inflation hits, expect your real wealth to deteriorate. Note that Ray Dalio is not asking you to buy gold. He is simply saying that gold is a great hedge for the events that will unfold.
For centuries, the shiny metal has served investors well when it comes to preserving wealth. This could be another one of its shiny moments.
Meanwhile in China, the central bank just announced something big.
China Increased its Gold Reserves by 57%, Could be Buying Even More
People’s Bank of China, the country’s central bank, announced last month that gold reserves at the end of June 2015 were at 53.3 million ounces, or 1,658 tons.
That was a 57% increase in the country’s gold reserves since they last reported in April 2009. After adding 604 tons of gold to the country’s vaults, China has surpassed Russia to become the country with the fifth-largest amount of gold reserves.
Showing its gold reserves this time around reflects China’s effort to internationalize its currency, the yuan. The country’s central bank has been asking the international monetary fund (IMF) to include the yuan in their Special Drawing Rights (SDR) basket.
Although the world is no longer under the gold standard, having gold reserves still gives credibility to a nation’s central bank and its currency. That is why China is updating its gold reserves.
The thing is, according to the IMF’s Managing Director Christine Lagarde, a country’s ideal gold reserves should be at least five percent of its foreign exchange reserves. Right now, China’s gold reserve makes up less than 1.7% of its foreign exchange reserves, and that’s after the 57% increase.
Simple calculation shows that if China were to increase its gold reserve to the IMF’s suggested five percent target, then it’s still got more than 3,200 tons or 74 million in ounces of gold to buy!
That would be a huge demand for the yellow metal. I wouldn’t be surprised if gold price goes up 100%, 200%, or even 500% and more very soon.