Dalio: Gold surpasses the Euro to become the second-largest currency, central banks accelerate de-dollarization

Bridgewater founder Ray Dalio warned of the coming “capital war” at the Davos Forum, with central banks shifting from US Treasuries to gold. Gold has become the second-largest reserve currency, rising 67% over three years. While US debt expands, buyers decrease, and geopolitical conflicts increase sanctions risks. It is recommended to allocate 5-15% of your portfolio to gold, with an overweight during wartime. Gold carries no risk of confiscation, has limited supply, and offers the best long-term purchasing power.

A Historic Shift in Central Bank Reserves Composition

Last week at the World Economic Forum in Davos, Dalio discussed with Alan Murray of The Wall Street Journal Leadership Institute the convergence of debt, capital flows, domestic politics, and international conflicts. Dalio emphasized that the operation of debt cycles is the same for individuals and nations, only governments can print money.

“When your debt relative to income is very low, you can increase debt without issue. But as debt and repayment obligations grow, they start to squeeze your spending. That’s when you begin to face financial problems,” he said. There are also supply and demand dynamics: “In other words, one person’s debt is another person’s asset. So, when you sell bonds and someone holds those bonds, they expect a decent real return; otherwise, they won’t hold them. The world already has a lot of such debt, and you’re still selling more. Do you want to buy more?”

Dalio stated that increasing geopolitical conflicts add another layer of complexity and risk. “We’re now talking a lot about trade wars, and you might see more ‘capital wars,’ or you can understand why buyers or holders of dollar-denominated debt might see it as risky—either because of supply and demand or because you’re in a war-like environment. If you’re other countries, wouldn’t you worry about potential sanctions? And if you’re the US, there’s a risk of debt being unsellable.”

This new risk consideration is very evident among sovereign buyers, who are abandoning fiat currencies in favor of hard assets. “What you’re seeing now is a change in central bank reserves: they are shifting toward gold. Gold is now the second-largest currency,” Dalio said. “Why has the gold market risen? Why is it rising? You see central banks and sovereign wealth funds around the world starting to accumulate this kind of ‘currency.’ Why? Because it’s a safer ‘currency.’”

Data from the World Gold Council confirms Dalio’s observations. In 2025, global central banks will buy gold at a record high, with countries like China, India, Turkey, and Russia continuing to increase holdings. After Western sanctions, Russia increased its gold reserve ratio from 10% to 25%. China’s central bank has increased gold holdings for 18 consecutive months, with reserves exceeding 2,300 tons. This de-dollarization trend will only accelerate amid geopolitical tensions.

In the current environment, Dalio finds it most surprising that people are still surprised. “What shocks me is that every day, people wake up, read the news, and are shocked by things that have never happened in their lifetime. Connecting the dots. What’s happening with money? Why has gold risen 67%? We’ve been through this before. Who are the buyers? What’s happening domestically? Pay attention to what’s unfolding! Isn’t this the real story?”

The Iron Law of Currency System Collapse

On October 30 last year, Dalio elaborated his “fiat currency vs. gold” thesis in a detailed LinkedIn post, stating that gold should be understood as a fundamental currency rather than a speculative asset. He pointed out that throughout history, all currencies are either “pegged/hard asset-backed currencies—linked to gold or other supply-limited, globally recognized value items (like silver)” or fiat currencies, “which are not backed or pegged to anything, and thus their supply is unlimited.”

He noted that historically, whenever a currency backed by gold or assets carried excessive debt or promises, the currency system would collapse. “This happens because national leaders either a) insist on a promise to support the currency with gold, leading to default and deflationary depression; or b) break the promise to exchange gold at the promised price, allowing them to create large amounts of money and credit, which often results in currency devaluation, higher inflation, and higher gold prices.”

“Before central banks appeared (the US introduced them in 1913), the path was usually a) deflationary, but after their emergence, it became b) inflationary. In both cases, major debt/money collapses/crises follow, and are resolved by raising price levels, which reduces the debt-to-income ratio needed to service the debt at new, higher price levels.”

Historical Cases of Fiat Currency Collapse

Germany in the 1920s: The Weimar Republic printed money to pay war reparations, leading to the collapse of the mark, with gold becoming the only reliable currency.

USA in the 1970s: Nixon closed the gold window, leading to dollar devaluation, with gold rising from $35 to $850.

Venezuela in the 2010s: Hyperinflation of the bolívar, with people rushing to buy gold and Bitcoin to preserve value.

Since all currencies have been fiat since 1971, Dalio believes the lessons of currency system collapse are more relevant today. “In such cases, central bank leaders always create large amounts of money and credit, which usually leads to higher inflation and higher gold prices. In all these cases, gold performs well as an alternative to ‘paper debt currency.’ Over long periods, it has been the best currency for maintaining purchasing power. That’s why it is now the second-largest reserve currency held by central banks.”

5-15% Allocation and Tactical Adjustments

Smart investors should allocate 5%-15% of their portfolios to gold—possibly more during war or fiat devaluation periods. “In my view, gold is a currency, and it has the lowest risk of devaluation and/or confiscation, which is indisputable,” Dalio said.

One of gold’s main advantages over fiat currency is that “compared to other currencies and assets, its risk of confiscation is lower. Because it doesn’t rely on payments from someone else, and individuals or governments find it harder to take it away from you.” For this reason, “during currency/money crises and/or periods of increased confiscation risk and war, gold’s value skyrockets (or more precisely, it is a currency whose value does not decline). That’s why, over the long term, gold has been the most fundamental currency.”

Dalio also shared his analysis of gold as an independent investment asset. “The way I view gold in building a portfolio is the same as all other assets—by examining its expected return, risk, correlation, and liquidity relative to other assets to develop a strategic asset allocation. Therefore, I believe that holding a certain amount of gold with specific characteristics as part of a portfolio is similar to holding cash with its own characteristics.”

“When I think about how much gold someone’s portfolio should hold, the first and most important thing is to see it as a strategic asset allocation, not a tactical/market timing decision. I believe everyone’s starting point should be understanding and holding the optimal portfolio, without relying on any tactical market views. For this reason, when investors ask me whether they should buy or sell gold based on my view of whether gold will rise or fall, the proportion should be between 5% and 15%, depending on other assets in the portfolio and the investor’s risk preference.”

“As for tactical overweighting or underweighting gold in a portfolio, during currency system collapses, high confiscation risks, and economic/money wars (e.g., sanctions), it should be overweighted. During other times, it should be underweighted, because over long timeframes, gold (like cash) has generally performed relatively poorly as an asset, since it is not a productive asset. Regardless, you should see gold as a fundamental currency, and at least hold some. Most investors hold none at all.”