A paradigm is essentially a model. Sometimes paradigms are imposed to control or govern events within a certain context (rules and conventions defining home, work, society, municipality, etc). Other times, paradigms emerge organically, created or defined by the events surrounding them (trends, cultural tendencies, fashions, etc) .
When it comes to financial markets, successful investors are able to identify the characteristics that define existing paradigms with regard to fundamentals and investor sentiment. Moreover, investors who are able to identify “paradigm shifts” have a distinctive edge over the segment of the investing public that remains unaware of such changes.
This principle of identifying paradigms and paradigm shifts has been key to billionaire investor and founder of hedge fund Bridgewater Associates, Ray Dalio. In fact, he sees shifts happening every decade--a theory upon which he expounds in a LinkedIn post, covering the major paradigm shifts that have taken place over the last century..
Seismic Shifts in the Global Economy
According to Dalio, a major paradigm shift is taking place now. And he’s made the case that investing in gold may be the most prudent step to take, as central banks continue cutting interest rates, the effect of which adds more money to the system, devaluing currencies’ purchasing power over time.
In Dalio’s words:
“I think that it is highly likely that sometime in the next few years, 1) central banks will run out of stimulant to boost the markets and the economy when the economy is weak, and 2) there will be an enormous amount of debt and non-debt liabilities (e.g., pension and healthcare) that will increasingly be coming due and won’t be able to be funded with assets..I think that the paradigm that we are in will most likely end when real interest rate returns are pushed so low that investors holding the debt...will start to move to something they think is better.”
He adds, "The world is leveraged long, holding assets that have low real and nominal expected returns that are also providing historically low returns relative to cash returns...I think these are unlikely to be good real-returning investments.”
So, in terms of moving into “something better,” promising investments are assets that, according to Dalio, “do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold.”
Gold futures are currently holding at the $1,400 range, a significant increase since its $1,167 low in August of 2018. Investors await a Federal Reserve rate cut in just a matter of weeks. Anticipating a shift in the current paradigm, Dalio believes the prudent move would be to change one’s mindset as the current bull market continues to advance.
He writes, "In paradigm shifts, most people get caught overextended doing something overly popular” which ultimately can spell disaster to one’s portfolio. He continues, “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."
Financial expertise is meaningless without a real profit/loss track record to back it up. During the 2008 financial crisis, Dalio made a similar prognostication. But his hedge fund, Bridgewater, flourished as most investors across the globe found themselves in the red. Dalio attributes Bridgewater’s success to his astute analysis of the 1929 crash, applying its lessons to what he correctly identified as a similar paradigm shift.
And now, Dalio sees and end to the current paradigm in the near-term horizon. We can always wait and see what happens, observing how Bridgewater’s portfolio compares with the scores of investors who either don’t see the shift or don’t agree that such a transition is taking place. Or we can do the prudent thing and convert funds to gold and silver to hedge against the dollar’s decline.
As for us at GSI Exchange, we have been urging investors to buy gold since long before its current bull run, understanding that the best entry point for any asset in a bear market is always at the steepest panic phases of the cycle--November 2015, November 2016, and most recently, August 2018 (all of them, V-shaped recoveries).
Our bullish recommendation stands, considering that trade tensions between the US and its partners across the globe may not be progressing with the optimistic intensity to which many investors hold as a near-certainty, the global economy is slowly deteriorating, and geopolitical tensions are far from being resolved.