Bridgewater's 100,000-word article: The driving forces behind the surge in gold, its prospects, and why it is necessary to allocate gold

Three weeks ago, analysts at Bridgewater Associates recently had an insightful and content-rich discussion about the recent strong performance of gold assets and their future, selected for reference. The following is translated from Bridgewater Associates: Gold Hits All-Time Highs: Assessing the Rally and Gold's Role in Portfolios The most important information is in the chart below; if you only plan to spend 2 minutes, just look at this chart. Introduction In recent months, gold has been a very interesting asset, and in fact, it has been so for the past few years. Just last year, gold prices rose by more than 30%, and as of now, gold prices are approaching $3,000 per ounce, setting an all-time high. Since 2020, prices have increased by more than 90%. What is interesting about the trend in gold prices is that the normal relationship between gold prices and real yields (Real Yields, long-term treasury yields minus inflation, i.e., risk-free returns adjusted for inflation) has largely broken down, reflecting the fact that demand for gold is increasingly seen as a substitute for the dollar in some countries. This phenomenon has been particularly evident following the conflict between Russia and Ukraine and the U.S. sanctions against Russia using the dollar system. Now, with the imposition of tariffs on some of our largest trading partners, there is growing skepticism about what this means for growth, inflation, and the entire monetary system, as well as what types of assets can provide protection in light of the recent sell-off in the U.S. stock market. This topic has sparked extensive discussions with our clients about where gold prices might head and how to view gold in their portfolios from a strategic asset allocation perspective. To discuss these issues, today our Head of Currency Research Hudson Attar and Portfolio Strategist Alex Smith have joined my discussion. Hudson, Alex, I want to welcome both of you. Chapter 1: Assessing Changes in the Gold Market Since 2022 Jim Haskel Hudson, let's start with you. Perhaps you can begin by summarizing the changes in the gold market since the Russian invasion of Ukraine, as I really believe this shift is key to understanding how today's investors view gold. Hudson Attar I think it's necessary to briefly build this issue from the nature of gold and what it means to hold gold as an investor, particularly the relationship between holding gold and other things that investors can hold. In my view, the core attribute of gold is that, first and foremost, it is not anyone's debt, and you don't have to worry about others having designs on your gold savings. The value of gold is not based on someone’s promise to pay you back, which is different from bonds—where someone clearly promises to pay you back—and also different from stocks, where the value prospects depend on the profitability of the company The supply of gold is also limited, which means that the ability to produce more gold is regulated through mining rather than being easily printed at the government's request. Therefore, there is a natural limit to how much can be produced at any given time, which can protect you from inflation. What I want to say is that gold is easily transferable and liquid, meaning that if you own gold, in general, it is easy to transfer that ownership across time and space, and it is also easy to trade and reinvest in other things you want to do. If you want to use your savings to spend on anything—if you want to exchange your gold for financial assets, it is straightforward. So, these are just the properties of gold, and I believe they create an asset behavior where what you gain from owning it is a guarantee of wealth and savings, knowing that it is unlikely to go to zero. What you give up is the risk compensation you get from lending money to others. Long-term bonds carry a risk premium because the government pays interest for you to bear the risk of owning its liabilities. Stocks are even more so: you bear the risk of things not going well. For gold, there may be no reason for a risk premium to exist. So, that is what you are giving up. I believe that after Russia invaded Ukraine in 2022, the gold market changed, which is the opportunity cost of dynamic wealth storage. That is to say, entering that period, the dynamic reserve of wealth—guaranteeing access to your wealth without relying on others to save—was not as prominent in the minds of most participants in the gold market. When the West sanctioned the Russian central bank's reserves, it became clear that holding fiat currency savings did not necessarily guarantee access to those savings if you wanted them. It depends on the political goodwill of the West and the United States. I think this triggered a reassessment of wealth property reserves and initiated an unprecedented scale of central bank entry into the market, leading to a significant rise in gold prices, a trend that continues to this day. Chapter 2: How Has Gold's Performance as an Asset Changed Jim Haskel Alex, Hudson just talked about these shifts, and I want to ask you how these shifts have affected gold's performance as an asset. Alex Smith The short answer is that I think its diversification characteristics are more valuable today. I say this because gold has always been a diversification tool against currency inflation. What I mean is that when the money supply increases and interest rates generally decline, the value of fiat currency decreases. Gold is attractive as a store of wealth and is another place to invest. This has happened before; it occurred during several rounds of quantitative easing after the financial crisis. You saw gold prices rise and real yields decline, with a very tight relationship between the two, representing very loose central bank policies and monetization. In the previous decade or so, the movements of U.S. real yields and gold were very closely tied, and today that relationship has completely decoupled, as shown in the figure: This highlights a unique characteristic of gold, which is that it is a truly global asset. In a sense, this is the most genuine form of geopolitical diversification, as it does not belong to any country. You see, when this relationship broke down in 2022, as Hudson mentioned, it coincided exactly with the time when sanctions were imposed on Russia. You can see the buyers and sellers driving the price, with an increase in purchases from the East and a decrease from the West. So in the West, there is no pursuit of wealth reserves. In the East, there is. Therefore, its geographical characteristics become a more prominent feature. Looking ahead, geopolitical tensions may ease. We all hope they do. But if they do not, this is a unique and valuable characteristic. Jim Haskel Alex, based on what you said, I want to ask Hudson again. I remember that in 2022, gold prices did not actually rise that much, but traded within a stable range. When you consider the situation at that time—real yields and bond yields were rising sharply, whether in the Treasury Inflation-Protected Securities market or nominal yields—it's somewhat surprising that gold did not fall significantly during that period. Hudson Attar Yes, I think if you had been watching the gold market for the past 10, 15, or 20 years before 2022, what you would know is that real yields rose by 150 basis points. If someone asked you how you thought gold prices would react, your answer would likely be a decline of 15% to 20%. You would see what happened in 2013 when our real yields surged, and gold prices plummeted. You would also see the opposite in 2008 when real yields fell sharply, and gold prices rose significantly. I think what misled you in 2022 was that central bank governors—previously, especially in the emerging world, they were mostly buyers of gold because real yields were low, and the expected returns on savings like government bonds, gold-backed bonds, and German bonds were low—these central bank governors had a brand new reason to enter the gold market if buying bonds and other currencies became risky. Therefore, I believe the fact that gold did not decline in 2022 indicates both the importance of the opportunity cost of gold—this is why it remained flat rather than rising—and the significant change in how these public institutions value holding gold versus fiat currency. Alex Smith Hudson, I want to further explore how you view the expansion of procurement ranges we are seeing, especially recently, expanding to a broader array of countries? Hudson Attar A dynamic worth noting is whether the competition among these central banks will lead to more and more decision-makers in reserve allocation entering the gold market. I think this will be crucial in the future. This is what you see in the peripheral countries of Europe—India and China are at the forefront. Then, over time, a second wave of buyers emerged. Emerging market countries in Europe are a group of buyers; Brazil recently reported that it purchased gold for the first time in January after about five years. I want to show everyone a flow chart of the central bank's gold reserves, which I believe truly highlights this point. Chapter 3: What is Driving the Rise in Gold Jim Haskel Let's take a look at the recent factors driving the gold market. Hudson, in my introduction to our discussion, I noted the substantial fluctuations in gold prices. Even this year, gold prices have risen by about 10%. By 2025, we have already seen the implementation of tariffs, numerous reports of physical shortages, and gold being repatriated to the United States. So, can you explain what has driven the rebound and volatility in the gold market? Hudson Attar I think the most important thing to understand about the current gold market and trading in 2025 is that tariffs generally exert bullish pressure on gold. I believe there is a significant connection between tariffs and gold and how it flows. But the most important takeaway is that this could be a form of bullish pressure. The reason it is bullish is that, first, it creates a one-time inflation. As Alex described, when the value of currency declines relative to the value of physical assets, this exerts bullish pressure on things like gold that cannot be printed. Typically, what offsets the bullish pressure on gold is that central banks recognize currency depreciation and raise the real returns on holding fiat currency assets; they increase real interest rates. However, when inflation occurs only once, central banks usually overlook it. Therefore, you can allow currency depreciation without a proportionate increase in the opportunity cost of holding gold. I think tariffs create a perfect storm for this specific type of inflation, where you can gain compensation for holding gold without having to pay a higher opportunity cost. I think this is bullish. I also believe that the increased uncertainty surrounding trade policies and international relations is bullish. I think in these types of environments, people consider assets like gold, which I and Alex have mentioned. I believe the diversification of assets held becomes more valuable. So, I think this is an important forward-looking thing to keep in mind, as it is a way to understand the rally recovery since Trump's election and the initial consolidation that occurred in the following month. Looking back, when discussing the specific dynamics that have occurred, I believe there is at least a somewhat technical dynamic in the gold market, where U.S. gold importers are somewhat looking to lock in the gold prices they paid before the tariffs. They achieve this by going long on gold futures on COMEX, as this is a very cheap way to go long on gold. In fact, you don't have to extract and store the asset until you ultimately need the gold As a result, there has been a significant increase in demand for gold futures on COMEX, which is so important—about a month ago, Trump began talking about imposing tariffs on Canada and Mexico. Due to the surge in futures demand, the futures prices in New York have deviated from the futures prices based on cash gold prices and borrowing rates. These two should be essentially equivalent. Therefore, participants in the gold market realized that if gold increases by 5% in the future, I can borrow money at 3%, use the borrowed money to buy gold, throw it into the New York vault, and then cash out in the future, I can earn 2% with basically no risk. The only risk I face is the "arbitrage" risk, which is the difference between the futures price and the price that is unfavorable to me during this period. So I think, at least to some extent, one reason all the physical gold is coming to New York is that gold banks and commercial banks have recognized the arbitrage opportunity. They have obtained as much gold as possible from the Bank of England's vault and Switzerland. They transferred it to the COMEX vault, stored it, shorted the futures, and tried to collect the time difference. Therefore, I believe the whole story is that importers want to get ahead of the tariffs, thus having the opportunity for futures and cash arbitrage, which requires physical gold to enter the warehouse to support these banks' short positions in the futures contracts. Chapter 4: Discussing Some Hot Topics in the Gold Market Jim Haskel I think some of the hot topics that have recently emerged in the gold market are worth discussing. For example, there have been many headlines about whether the U.S. will reassess the gold held by the Treasury, and President Trump has also talked about auditing the gold at Fort Knox. Can you explain how investors should view these stories? Hudson Attar It's really hard to know what is happening in the gold market, and it is well known that the gold market is opaque. So I want to make it clear that what I say is somewhat speculative. That said, to describe my view on the question you raised, I think the first and one of the most discussed areas of interest in gold is whether the Treasury will revalue the gold it holds on its balance sheet as an asset. Jim Haskel It is priced at about $42 per ounce. Meanwhile, prices fluctuate between $2900 and $3000. So what impact would pushing it to the market have? Hudson Attar The gold market, that is, the price of gold, is determined every day by the number of buyers and sellers and how they trade. For the revaluation to impact the gold market price that you and I face, I think it must create a liquidity. Someone either wants to sell gold, or someone wants to come in and buy gold because of the revaluation. At least from my perspective, there is no direct link between the Treasury's revaluation of its gold held on the balance sheet and any direct buying pressure in the market that you and I face. So I don't see a super direct connection there. I might be missing something, but that is my understanding of the mechanism—it's largely an accounting change rather than a change in the liquidity of the gold market. Therefore, if the Treasury revalues its gold assets, I do not expect there to be much pressure Alex Smith The only way you can get cash flow is if you buy back gold or something similar and issue more treasury bonds. But I think Secretary Bessent denied this in Bloomberg—this doesn’t mean it won’t happen, but when they directly asked him this question, he said, “That’s not my idea.” So, I also don’t see the liquidity. Hudson Attar My understanding is that, generally speaking, when you store gold, the standard operating procedure is to minimize the amount of information you provide to the public, as this can create vulnerabilities and infringe on privacy. So, if you ask the operators at the New York Federal Reserve Bank or the operators at the Bank of England, they will tell you that this is their basic policy—to minimize the public dissemination of information about how they store gold, the exact location of the gold, the nature of the vaults, etc. That’s my understanding of the transparency around Fort Knox. I believe the Mint audits and assays the gold every year. For reasons of limiting information, the details of these audits are not made public. So I think the most important thing is that there is no conclusive evidence that any gold is missing from Fort Knox or that its purity is below expectations. There’s only one issue—I think this issue may arise because people want to limit information to protect security and privacy. Chapter 5: The Role of Gold in the Portfolio Jim Haskel Okay, Alex, let’s get back to the original topic. Considering all the different dynamics we’ve discussed today, how should investors view gold as part of their portfolio? At Bridgewater, one approximation we’ve suggested over the years is that considering the negative correlation of gold with financial assets, an allocation of about 10% to gold would help diversify the portfolio. Now, when you provide diversification advice to clients today, especially regarding their gold allocation, is the same 10% a reasonable range for most portfolios? Alex Smith Our clients are very sophisticated in asset allocation; they conduct robust assessments based on these characteristics. But we absolutely believe that allocating to diversified assets—gold has unique diversification characteristics—within the range you mentioned makes sense. This is not because gold is a return generator—we believe that the risk premium of gold or its expected return above cash may be zero, and gold as an asset does not have the same logic for risk compensation as bonds or stocks. But even so, we assess its value in the portfolio as very significant. So, in quantitative terms, you can view gold as a negatively correlated asset. Over longer periods, like three to five years, its correlation with financial assets like stocks and bonds is about -30%, and of course, this is just the result of the diversified assets we are discussing. Another characteristic is that when traditional financial assets decline, gold tends to perform very well in that scenario. Jim Haskel We want to display a chart to illustrate this point. This chart dates back to 1900. It is not perfect, but you can see that the blue line represents gold prices, while the red line shows the returns of a 60/40 stock-bond portfolio during downturns, indicating losses. You can observe a very strong negative correlation between gold and the 60/40 portfolio. Alex Smith Yes, I think when you present this chart, it is a very striking chart. You can imagine that a world where gold performs well often does not bode well for your traditional portfolio. Chapter 6: Why Gold is So Diversified Jim Haskel Can you elaborate a bit more? Why can gold be so different when traditional portfolios are underperforming? Alex Smith When you face rising inflation or declining growth, traditional financial assets typically perform well, depending on how much you allocate to stocks and bonds. If the economy generates a lot of cash flow to be earned, especially on an inflation-adjusted basis, holding stocks and bonds is usually a good time for traditional financial assets, while it is often not a good time for gold, as it competes with these income-generating assets. When your economy is not generating those real returns above inflation, gold becomes increasingly attractive. This often occurs in recessionary environments. It is also often when bond yields are declining. It may also appear over a longer period in more stagflationary environments. Geopolitical shocks are another unique situation. Low inflation, robust growth, and good investor returns are often poorer times for gold, and you do see that. I have certainly spoken with some allocators who felt frustrated buying gold in 2012, and then you saw the changes in real yields that Hudson mentioned earlier, and gold fell. But this is something that a diversified portfolio inevitably has to face. When an asset loses value for the reasons you expect during the time you anticipated, while your broader portfolio performs well, it is all fine from a portfolio construction perspective. But you want to understand these characteristics and be clear about what will happen so that if gold performs either up or down, you can have a very clear way to explain it to your stakeholders. The common counterargument is, "Well, how can I allocate 5%, 10%, or 2%?" I mean, many people are at zero, Jim. When I have to earn a return of 7% or 7.5%, how do I allocate my portfolio to non-productive assets? It is worth noting a couple of things. First, gold is inherently a highly volatile asset, and you want its volatility because it offsets the volatility you have in some other assets. Therefore, you can use a relatively small capital allocation to reduce the overall portfolio volatility The second thing is that you can use portfolio engineering to construct gold as a hedge. For example, holding gold futures, or you hold gold and leverage elsewhere in the portfolio. So, these are all ways you can monetize better risk-adjusted returns into higher returns. Therefore, as we look to the future, it needs to be clear that I don't want people to get the wrong idea; gold could easily drop from here, and there are many outcomes, but considering that many investors are at zero, it may be valuable to make some allocations given the specific environment where gold could outperform the market. Jim Haskel The charts I'm showing you now illustrate this relationship. When you look at the top chart, which shows developed market bonds and gold, you can see the negative correlation between the two. In fact, there is a -26% correlation. Then, when you look at the world stock market and gold, the correlation is -25%. So gold really is a good hedge asset. Alex Smith That's right. You won't find another asset like this. There is no asset that you can buy and hold that operates with such a correlation to traditional financial assets. It is very rare and therefore very valuable. Jim Haskel Alex, you mentioned earlier that theoretically, investors should not expect gold to provide them with higher positive returns than cash over time. You could argue that it should actually have negative returns because I think you should pay a price for the privilege of holding an asset that cannot default. But in practice, the opposite is true. The return of gold relative to cash is positive. So my question is: how much do investors really need to rely on the belief in diversification to justify holding gold? If gold is so diversified, isn't that already reflected in the gold price? Finally, can you imagine a scenario where an investor's allocation to gold makes no sense? Alex Smith I think you really need to believe in diversified assets. Of course, it depends on this. I think there is good logic in the issue we are discussing. Then, regarding why this is not considered, I think diversification is a very difficult thing for investors. Theoretically, it should be taken into account, but so many investors are evaluated in a way, and I think the way many investors' minds work, especially the valuation of stakeholders, is largely based on returns rather than diversification. Therefore, it makes sense to me that diversified investments are not priced. Today, gold prices are a bit high, and I think this reflects more that prices have gone up, and people like it, rather than viewing it as a strategic diversification, at least in broad terms There may be various viewpoints on this. Then, when you consider investors, there are many investors that do not work when you hold it. If you absolutely cannot afford leverage and you have a high return target, it will increase your ratio, but you cannot achieve the return target through monetization. Now, you may have other ways to do this. For example, we published an observation report that at a given valuation point in time, gold miners are those companies that have embedded gold exposure, and then there is a business on top of that. Basically, when you look at gold exposure, this business is very cheap. Therefore, this could be a way to gain risk exposure that allows you to achieve returns within the investment guidelines. If you think in a completely unconstrained way, like, suppose someone says, "Well, no, I'm completely unconstrained, but I really think it will be zero." Would I hold any of that? Portfolio math would make you hold a little of something that is negatively correlated by 30%, especially in a more medium-term correlation — which is more valuable for capital preservation in some ways. So, these are all the issues you need to address, but you will likely find that "this is not the diversification investment I need." Of course, we do not want it to be the only diversification investment tool you rely on in your portfolio. Chapter 7: The Outlook for Gold Jim Haskel Hudson, let's get to the last sentence of this podcast episode. Alex, you too. Where do you think gold will rise to? How do you see the outlook for gold? Hudson Attar If you don't know what today's gold price is, you only know the state of the world and the impact it has on gold, I think, overall, the situation will be quite optimistic. The combination of tariffs, I think, is a bullish factor, as I mentioned, because they will cause one-time inflation, increasing uncertainty and volatility in trade and international relations. You also have the emerging global order and other characteristics of President Trump's term, as well as questions about his predictability regarding U.S. allies and overall political alliances between countries. The debt levels in the public sector of developed countries are very high. I think these three things are bullish for gold — as opposed to financial assets that people can pay with their fiat currency savings. At the same time, there are also some pressures. I think you have to decide how serious you are about this. But I think the push for stronger fiscal discipline in Western countries, especially the United States, is a bearish directional pressure on gold. It is unclear how much they can do, but I think if the U.S. significantly strengthens fiscal discipline and greatly reduces the deficit, it will be unfavorable for gold. I think, most importantly, you have the fact that many of the reasons gold is attractive now are well-known consensus and are driven by large positions taken by speculative and faster participants in the market. I think compared to early 2022, those participants who are already in some state make the bullish outlook for gold less clear, at a time when the world had just changed and there was no trend to point to Therefore, when I put all of this together, I believe that, ultimately, we are talking about gold as a market where the terminal demand for precious metals is relatively low compared to the demand that flows in and out of the balance sheets of gold investors. This is why gold prices can experience significant fluctuations over 10 or 20 years—because these changes and pressures take a long time to reflect in the actual gold held by people, as market demand is related to the assets and liabilities of the participants that need to trade. Thus, I believe that, at least in the short term, the situation is likely to continue supporting gold prices, but it is uncertain whether the market's trading demand has already gone too far or how much further it can go. Jim Haskel Well, that's all for today. Thank you both for your time. fundpie, original title: "Bridgewater's 10,000-word article: The driving forces behind the surge in gold, its prospects, and why gold allocation is necessary." Risk warning and disclaimer The market has risks, and investment requires caution. This article does not constitute personal investment advice and does not take into account the specific investment goals, financial situation, or needs of individual users. Users should consider whether any opinions, views, or conclusions in this article are suitable for their specific circumstances. Investing based on this is at your own risk