Bridgewater Associates founder Ray Dalio pointed out why gold climbed 80% to $5,200 per ounce while Bitcoin (CRYPTO: BTC) fell 25%, argued central banks won’t buy Bitcoin due to privacy and controllability issues.
The Central Bank Gold Rush
Gold is the second largest reserve country currency that central banks hold, not a speculative precious metal.
Central banks have acquired gold to build reserves for economic, political, and geopolitical reasons.
“Gold is the only asset that can be transferred from one place to another, they can’t print a lot of it, and it is not dependent on somebody giving you something,” Dalio said on the All-In podcast on Tuesday.
Most money involves holding a promise from somebody to give you buying power. Gold requires no such promise.
The price increase brought gold from an extremely small allocation to something approaching the historical average.
However, total wealth remains large relative to money, creating an imbalance.
Dalio recommends portfolios hold between 5-15% in gold regardless of market view because of how it works with other components as a diversifier when crises hit.
Why Bitcoin Failed As Safe Haven
Bitcoin has several differentiating characteristics that prevent it from performing like gold.
Transactions can be monitored and potentially controlled. Central banks are not going to want to buy Bitcoin and hold it.
Additionally, Bitcoin has a high correlation with tech stocks. From an ownership perspective, if somebody gets squeezed in one position, they sell whatever else they have in their portfolio.
This creates supply-demand dynamics that work against Bitcoin during stress.
Bitcoin is a relatively small market that’s relatively controllable. “There is only one gold,” Dalio emphasized. As a money, Bitcoin is small in relationship to gold.
The Money Question
Dalio explained that money mechanistically is debt. When holding money, you’re holding it in the form of a debt instrument. If holding a debt instrument, you’re getting a promise from somebody to deliver you money.
The power of central banks when they have too much debt is to print money.
This creates the fundamental question: What money is safe? When countries have enormous wealth relative to money, and when central banks can print fiat currency, gold becomes the only transferable asset that isn’t dependent on someone’s promise.
The shift from fiat to gold accelerated because of supply-demand issues, political factors, and geopolitical tensions.
Central banks moving from an extremely small gold allocation to a less small number drove the 80% price increase.
Image: Shutterstock
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