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Dalio Believes Inflation Will Be A Boon To Gold Prices

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EDITOR NOTE: As the Federal Reserve aims to overshoot its 2% inflation target, justifying an  excessive round of multi-year money-printing, the dollar’s status as the world’s reserve currency is under severe threat, according to legendary investor Ray Dalio of Bridgewater fame. The direct beneficiary of the dollar’s monetary destruction-by-decline, unsurprisingly, will be gold. Given the high inflationary environment before us, the prospect of gold rising to $3,000 an ounce seems all the more credible. Yet to some analysts, even that price level seems a bit muted, especially if you take into account the implementation of the Basel III accord which will officially recognize gold as a tier 1 currency among global banks in 2023.

Veteran fund manager Ray Dalio has warned the U.S. dollar’s status as global reserve currency is in danger due to steps taken to support the economy during the coronavirus pandemic. The founder of Bridgewater Associates flagged excessive money creation as the big risk for the U.S. dollar, whose weakness in recent months has helped push gold prices to record highs.

The price of gold rose above $2,000 for the first time in August. If the dollar’s status as global reserve currency is further eroded, then targets of $2,500 or $3,000 will seem increasingly credible. With the Federal Reserve relaxing its stance on inflation, the loss of its status may already be happening.

Ray Dalio Fears for the U.S. Dollar

Speaking in an interview on Tuesday, Ray Dalio said trillions of dollars in quantitative easing and fiscal stimulus is having the effect of weakening the dollar:

There is too much debt production and debt monetization.

Since the coronavirus pandemic gained momentum in March, the Federal Reserve has been on a spending spree. Its balance sheet has expanded from roughly $4 trillion at the end of February to just over $7 trillion today, as it bought up bonds and mortgage-backed securities.

The Fed increased its balance sheet by $3 trillion in three months. | Source: Federal Reserve

Aside from causing stocks to skyrocket, this unprecedented stimulus has had several significant effects, such as weakening the dollar against most major currencies.

The British pound (blue), euro (green), and Chinese yuan (red) have all risen against the dollar over the past six months. | Source: Yahoo!

Because the dollar has weakened over the past six months, investors looking for a haven have increasingly turned to gold. The gold price was only $1,478 on March 19 but hit $2,051 on August 6.

The price of gold and the S&P 500 (red) have risen by similar percentages since March. | Source: Yahoo!
Gold Price Will Hit New Heights

With the U.S. economy still feeling the severe effects of the coronavirus pandemic, the dollar’s weakness is likely to persist.

Unemployment is still at least double pre-coronavirus levels. | Source: Bureau of Labor Statistics
Rather than benefiting other fiat currencies, Ray Dalio predicts that the primary beneficiaries of the dollar’s downfall will be gold and stocks:

There’s not yet a good alternative in the form of a currency … Because the three major reserve currencies all have the same basic problem … That’s why [investors] move into a new store-hold of wealth. And the store-hold of wealth … is equities, is gold, is other asset classes that go up.

At the end of August, the Federal Reserve announced it would take a new approach to inflation. Rather than keeping inflation under 2%, the Fed will now treat 2% as an “average” level. This means higher inflation is coming, something which will further weaken the greenback.

It will also boost the price of gold. Some analysts have recently set a target gold price of $2,500 by the end of the year, while Bank of America set an 18-month target of $3,000 in April.

Such targets look increasingly realistic, particularly when Dalio suggests the Federal Reserve could get locked into a spiral of bond purchases as it tries to prop up the economy.

If those who are holding bonds … choose to sell the bonds because they’re not providing a good return … that puts the Federal Reserve … in the very difficult position of operating like a currency defense … they’re forced to buy more and more [bonds], and that is how a spiral could occur.

Originally posted on CCN

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