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Ray Dalio says we should sell stocks and buy gold. Is he right?

Billionaire hedge-fund king Ray Dalio released an essay called ‘Paradigm Shifts’ over the weekend, which you can read here on LinkedIn.

In this essay, Mr Dalio outlined the causes of many past stock-market crashes and where he thinks the economy (well, the US economy) is headed over the medium term. It’s not pretty. Dalio outlines his view on record-low interest rates and what it has meant for stocks – namely a huge influx of cash as investors seek real-yielding assets as cash and bonds have become almost useless for anything other than short-term capital preservation.

This explains why both the US and our own Australian sharemarkets are experiencing record highs, while our economies have remained relatively sluggish. However, Dalio also says that the biggest danger for investors (and one which will probably eventuate) is assuming that these trends will last forever. High stock markets encourage higher levels of borrowing as investors chase profits. This will, according to Dalio, inevitably lead to disaster.

A decade of low interest rates has seen the level of government debt balloon, both here and overseas – US government debt now stands at US$22.52 trillion, where as our debt now stands at roughly US$687 billion. In order to service this debt, Dalio argues that all countries (particularly the US) will have no choice but to keep interest rates low and continually depreciate currencies in order to fund the costs of ageing populations.

What does this mean for shares?

Dalio argues that as the US dollar and other currencies continue to depreciate, investors will start seeking assets that will prosper from lower currency valuations – namely commodities such as gold. Shares and property in particular will be hurt by falling currency values, so Dalio argues that as a whole, these assets will not continue to experience the growth that they have enjoyed over the past decade for too much longer.

A Foolish takeaway

I think the best message for sharemarket investors to take out of Ray Dalio’s essay is to make sure we invest only in quality companies that can continue to effectively compound wealth internally and generate returns in all economic climates. In a bearish market, it quickly becomes survival of the fittest, so solid companies like CSL Limited (ASX: CSL) and Macquarie Group Ltd (ASX: MQG) might be a good bet here.

Of course, you could also add some gold to your portfolio as a hedge, as Dalio also recommends. Gold exchange traded funds (ETFs) like ETFS Physical Gold ETF (ASX: GOLD) would be a good choice, or even a gold miner like Newcrest Mining Limited (ASX: NCM) to give you some diversification here.

For more quality ASX companies, make sure you don't miss our favourites right here.

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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of CSL Ltd. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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