Ray Dalio predicts a “paradigm shift” in investing where gold investors benefit

Ray Dalio, chief of Bridgewater Associates, predicts the ongoing party in stocks will soon run its course.

Investors are likely to headed for the exits amidst lower returns on equities, according to Dalio. In a lengthy LinkedIn post issued this week, Dalio projected a world of lower earnings, greater debt, and higher gold prices.

“Paradigm shift” in investing

As earnings shift lower, the indices may come off their record peaks. This would leave investors stranded at higher valuation levels.

“In paradigm shifts, most people get caught overextended doing something overly popular and get really hurt,” Dalio wrote Wednesday. “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.”

Ray Dalio’s prime example of a paradigm shift is the 2008-09 financial crisis. Dalio notes that debt growth rates were unsustainable during the run up to that crisis.

Dalio says another shift is around the corner. He cites lower interest rates and quantitative assets by central banks that will eventually become unsustainable. Amidst rising asset prices and lower future returns, the value of cash has fallen to nearly zero.

At some time in the future, real interest rate returns could fall so low that investors holding the debt will sell. Dalio believes they will seek greater returns in other assets.

The resulting scarcity of liquidity would result in the monetization of large deficits, currency depreciations, and large tax increases.

Gold prices set to shine

Dalio recommends gold in light of the rising trend of global conflict. Gold also performs well in an environment where the value of money erodes.

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

Dalio has also warned that the Federal Reserve could lose control of the economy.

With negative interest rates popping up around the globe and equity markets facing increased volatility, gold and silver could benefit as investors flock to safety.