Last night I was watching the following videos https://www.youtube.com/watch?v=YVLJRGA5uAk and https://www.youtube.com/watch?v=AhDrvQiNV5M&t

I am considering the bet on gold with respect to his logic. This logic goes simplified as follows (at least as far as I understand, please correct me if I am wrong).

US government has debt (to creditors in terms of bonds and its people in terms of different obligations). To meet these obligations they'll print dollars which in turn will devalue the dollar.


Is he saying that the dollar might lose confidence and value and that this in turn might lead investors and other governments to gold as the reserve currency status takes a hit due to the printing? If this is the case what is the dynamic/logic that leads from this to gold?

I am not asking if this will happen just if this is his logic.

  • 5
    Basically every administration, since the Clinton first 4 years has increase the deficit. The Clinton's did lower the deficit by lowering the interest rate dramatically, but not the appetite of the federal government. So this state of affairs has existed at least since the early 90's and possibly going back to the Vietnam war. What has changed that now makes the compelling case for gold?
    – Pete B.
    Nov 8 '19 at 13:20
  • @PeteB. the piper eventually has to be paid. Not that this makes a case for gold (unless you think that gold will weather the storm and you know when the storm will hit).
    – RonJohn
    Nov 8 '19 at 13:37
  • I can't help you with Dalio's point of view nor do I subscribe to investing based on macroeconomic theories. But I have owned as well as traded gold stocks for 30+ years and one thing that has served me well is buying them when they have large corrections (10, 20 even 50% down). You'll never know where the bottom is but you're likely to buy them much closer to the bottom than the top. They always offer good option premiums so in times of stagnation, there's income to be made until they break out of the range. And for the more risk averse, sell credit spreads. Nov 8 '19 at 13:40
  • @RonJohn well if they pay it by printing dollars then the dollar would certainly drop, right?
    – user123124
    Nov 8 '19 at 14:47
  • 1
    @PeteB. I am trying to understand this to, Dalio seems to be hinting at this in the videos but I dont understand it completely. I only get to as far as that FED will print their way out of debt. He talks about "what else" but I dont see what this what else could be and what it would be needed for. I.e what is the dynamics of the problem that coould lead people into gold.
    – user123124
    Nov 8 '19 at 20:37

The problem with this is that gold doesn't actually DO anything, it just sits there. In fact, holding it will most likely impose costs for security, even if it's only the cost of buying a safe to hold your collection of gold coins. So any change in the value of gold is related more to speculation than anything. If you look at the price in dollars over say the last 100 years, you'll see that it swings wildly: https://www.macrotrends.net/1333/historical-gold-prices-100-year-chart

Stocks, OTOH, represent ownership of companies that actually produce products. If the value of the dollar (or other currency) changes due to the government printing more money, the companies just raise their prices accordingly. So although individual companies may decrease in value, or even fail outright, overall (and in the long term) the stock market grows faster than inflation: https://www.macrotrends.net/1319/dow-jones-100-year-historical-chart


I was going to make this a comment, but it actually may help provide one possible answer to your question.

The main thing is this - the government can't just "print dollars". Instead, it has to issue marketable (debt) securities, that is, do something like create treasury bills, notes, bonds, etc. and sell them to willing buyers. If the government sells too much debt relative to what buyers are willing to purchase, interest rates will rise. Furthermore, it can't just do this whatever it likes, instead legislation must be passed authorizing the spending, and as seen by the periodic "debt ceiling theater" it has a limit on how much debt it can actually have without passing more legislation just to raise its own credit limit. These "limits" may seem largely symbolic or accounting "tricks", but they do serve as a check on the process.

Debt is not the main way the government gets money, of course. Debt covers deficits in spending, but the majority of the funds the government spends are from taxes. As the U.S. has been running a deficit for a number of years, the current way the government is paying back the money is actually similar to refinancing - taking on new debt to retire the old. People have been prophesying the "end" for at least 20-30 years now, and maybe someday they will be right, but this does not make for a good investment strategy.

Also, another thing to consider is that the U.S. is not the only country with debt. Relative to GDP, the U.S. is around 35th in the world, measuring either by total national debt or external debt, well below other countries such as the U.K. or Japan. As such, it is still possible for the value of the dollar and the economy as a whole to hold up better than expected, simply because it's the best option around compared to the alternatives.

  • well, i think Dalio is referring to the scenario that the central bank "prints" money and buy the debt from the government i.e debt monetization.
    – user123124
    Nov 8 '19 at 16:54
  • the government can't just "print dollars". Sure it can. Not as useful in 2019, but would have been very inflationary 30 years ago.
    – RonJohn
    Nov 8 '19 at 17:13
  • 1
    You're conflating money supply growth and debt limit spending. In general, currency in circulation grows over time due to population and GDP growth. And as for the Fed not being able to do whatever it likes, consider the several rounds of Quantitative Easing that injected a sh*tload of money into the US economy. Did Congress vote on that one? Nov 8 '19 at 17:41

“I am considering the bet on gold with respect to his logic.”

Don’t forget gold is just a small part of his entire portfolio. Maybe 5% across gold and probably gold stocks.

Don’t forget that his timeframe is 10 years or more. He is prepared to lose for 5 years on gold, then let it recover and boom for 5 years. In the end he will annualize 8-14% on his bet after 10 years.

If you are prepared for a long trade then go for it if that’s what you want. Just want to let you know what you’re signing up for.

  • I am buying it "cheap" now and prepared to hold it for as long as it is needed, selling it in the event of a stock crash or alike. I am however grappling with his logic of that gold will be a good investment given our current macro condition. Which dynamic will lead the printing of money of the FED/US to solve it debt problems to the case that gold rises?
    – user123124
    Nov 9 '19 at 10:47
  • 1) printing money causes inflation as more money is entered into the financial system. Because gold is relatively fixed in total quantity, if you print more dollars, you need to pay more dollars for the gold. 2) printing money or inflation could eventually weaken the “confidence” that determines the existence of the US dollar - did this help or any more questions? Nov 9 '19 at 10:58
  • a decrease in confidence in the dollar increases the value of tangible assets, especially gold Nov 9 '19 at 11:00
  • right, well for some reason we dont have inflation tho..anyway could you incorporate these comments into your answer?
    – user123124
    Nov 9 '19 at 11:26
  • Just because something hasn’t happened when it “should have already happened” doesn’t mean it won’t still happen. In my opinion, no one truly knows how the economy actually works in the short term (5-10 years) There are theories usually based on past historical statistics but things are always changing. Considering a doomsday scenario or even a market crash, even though gold should theoretically go up, who is to say people won’t instead buy bitcoin...lol..leaving gold in the dust. I’d don’t believe it but anything can happen. Nov 9 '19 at 11:45

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