Ray Dalio: Gold is the Safest Currency Throughout History

Article Summary

• Gold is the currency least likely to be devalued and/or “confiscated.”
• Historically, monetary systems linked to gold have collapsed due to excessive debt.
• In fiat currency systems, excessive money printing leads to inflation and higher gold prices.
• Gold is an excellent alternative to paper currencies, with a proven track record of preserving purchasing power.
• Gold and cash can be a good currency mix given their liquidity and negative correlation.
• Gold is attractive because it is less prone to confiscation compared to other currencies.

Introduction

In a recent article published in TIME magazine, Ray Dalio, the founder of Bridgewater Associates, underscored gold's role as the least risky currency, maintaining its value for millennia while mitigating "confiscation risk." Dalio provides a detailed analysis of gold's performance under gold standards and fiat currency systems, alongside the logic of asset allocation between gold and cash.

Gold as a Timeless Currency

I have long been concerned about the value of government bonds and fiat currencies—and have written about why these concerns increase gold’s attractiveness. With the price of gold having moved up substantially since I first shared these thoughts, I thought that it would be valuable to share some of what I believe are the most important things to know about gold.

In my view, there is no question that gold is a currency and one that is least likely to be depreciated and/or “confiscated.” That’s why for thousands of years, in virtually all countries, it was valued and used as money while many other currencies came and went.

Gold in History: A Standard of Value

Historically, all currencies have been either “linked to/backed by hard assets” or fiat currencies. Currencies linked to or backed by hard assets tie their value to like assets that are limited in supply and universally recognized such as gold or silver. These types of currencies allow individuals or governments to exchange their “paper” currency for gold or silver at a fixed minimum. Fiat currencies, on the other hand, are not linked to any assets and are not backed by any assets, so their supply is unlimited.

Collapse of Gold-Linked Monetary Systems

Throughout history, when currency is linked to gold and debts are too high, the monetary system will always collapse. This collapse happens for one of two reasons: either leaders insist on honoring their commitments to gold-backed currency, eventually leading to debt defaults and a deflationary depression; or they violate the agreement to pay gold at the promised price, thereby printing large amounts of money and credit—which typically leads to currency devaluations, high inflation, and rising gold prices.

The Shift to Fiat Currencies and Inflation

Prior to the advent of central banks (the Fed was founded in 1913), countries were more inclined to choose the deflationary route. But since the birth of central banks, the inflationary path has become more common. Regardless of the path chosen, it will eventually lead to a serious debt crisis, the ratio of debt to the income needed to service the debt will decrease, and the problem is solved at a new higher price level. That’s why prices go up over the long run. The most recent two collapses of the currency linked to gold occurred in 1933 and 1971.

Gold in the Age of Fiat Currencies

In 1971, we completely abandoned the currency system linked to gold and shifted to the fiat currency system. Since we are currently still in the fiat currency system, studying cases in history where “debts far exceed the amount of money needed to service the debts” and the lessons learned from them are more relevant to the current situation. In these cases, central banks always print large amounts of money and credit, which typically leads to high inflation and rising gold prices.

Gold's Performance as a Store of Value

In all of these scenarios, gold has performed excellently as an alternative to paper money/debt money. Over the long run, gold is the best currency in terms of preserving purchasing power. This is why it is now the second-largest reserve currency of central banks.

Gold vs. Fiat Currencies: The Trade-off

But this does not mean that other currencies cannot store wealth worse than gold in the long run. Because paper money/debt money can earn interest, while gold cannot. Therefore, when the interest rate is high enough to cover the rate of depreciation of paper money/debt money, these currencies can generate higher returns.

If someone chooses to engage in “timing trading” (I do not recommend it), the strategy should be: hold paper money/debt money when the interest rate is high enough to cover the default and depreciation risks of that currency; but when the interest rate does not adequately cover these risks, it is wise to hold gold.

Of course, you can choose not to try to time it and always hold a certain amount of gold. Like cash, the real return on gold is low, around 1.2%, and is negatively correlated with cash. Therefore, for any environment that requires good liquidity, gold and cash can be considered a good mix of “currencies.”

Gold's Resistance to Confiscation

Gold is also often favored because it is less prone to the “risk of confiscation” than other currencies and assets. This is because the value of gold does not depend on obtaining funds from others, and it is difficult for individuals or governments to take it away from you. Gold is the most difficult currency to plunder—you can keep it safely in your hand, while the value of all other currencies depends on others fulfilling their payment. In addition, gold cannot be stolen by cyber attacks. That is why, when financial crises cause high taxes and other exploitative policies, or economic and financial warfare breaks out between countries (such as sanctions), resulting in a significant increase in the risk of confiscation of funds, gold becomes the asset of choice.

Gold as a Safe Haven in Times of Crisis

Therefore, in times of currency/debt crises, or wars that lead to an increase in the “risk of confiscation,” the value of gold increases significantly. More precisely, gold has not depreciated in value like other currencies.

Conclusion

That is why gold has always been the basic currency, and it is also the currency whose value matches the cost of living to the highest degree and for the longest period of time.