The U.S. dollar’s devaluation, due to inflation and geopolitical tensions, will drive gold up considerably this year, says prominent hedge fund manager John A. Paulson.
Furthermore, gold is likely to continue to appreciate in value over the next three to five years, Paulson says in an interview with journalist Alain Elkann.
The dollar began its slow descent as world’s preeminent reserve after World War II, he says. While the U.S. dollar will remain a powerhouse, says Paulson — who shot to fame by shorting subprime mortgages ahead of the 2008 Great Recession — the U.S. dollar’s “share of world GDP has come down, and the emergence of Asia, particularly China, as an alternative economic power has risen.”
The U.S. government overshot its response to the COVID pandemic, further weakening the dollar, Paulson adds.
“The amount of money printing the U.S. central bank has done in order to simulate the economy has also caused doubt,” Paulson says.
Inflation is a direct result of this money printing, Paulson emphasizes.
“If you had dollars and 9% inflation,” as the U.S. did in June 2022, “ this year, you lost 9% of your money,” Paulson explains. “Interest rates were nowhere close to compensating for that loss. This is driving investors and central banks around the world to look for an alternative reserve currency—and gold is rising again.”
As proof of this, central banks have bought up a record amount of gold in the past year — “and we’re just at the beginning of that trend,” says Paulson, head of Paulson & Co. in New York.
“Gold will go up, and the dollar will go down — so you’d be better off keeping your investment reserves in gold at this point,” he says.
“If you possess physical gold, you don’t face geopolitical risk,” Paulson continues. “You also have the potential for appreciation. We’re at the beginning of trends that are going to increase the demand for gold, and inflation and geopolitical tensions will determine the rate at which gold increases. This year, gold will appreciate versus the dollar — and also over a three-, five- and 10-year basis.”
Paulson foresees the U.S. economy entering a recession, albeit mild. Anyone who disavows themselves of this view need only realize that the Federal Reserve’s monetary policy of the past three years, up until April 2022, created so much excess liquidity in the economy that a hangover is overdue.
“It’s like having a party. We have a big hangover coming,” Paulson says. “At some point, we’ll have to either repay the debt or inflate the economy to monetize the debt. That’s what’s going on now.”
Paulson believes stocks are still overvalued and that major indices will decline over the next 12 months.
In the bond market, the investment manager says rising bankruptcies will create opportunities in high-yield and distressed bonds.
Investors unsure of where to put their money in the markets would be well-served to move a portion of their portfolio into cash so that they can buy stocks and bonds as their value reverses, Paulson says.
