‘Gold Is Now the Second-Largest Currency’: Ray Dalio on Why Capital Wars Are Driving a Global Shift

Gold has quietly become the world’s second-largest reserve currency, and Ray Dalio believes the forces behind that shift point to a far more dangerous global environment than many investors are willing to acknowledge.

Speaking last week at the World Economic Forum in Davos, the founder of Bridgewater Associates laid out a stark assessment of rising debt, intensifying geopolitical conflict, and what he describes as the early stages of “capital wars” — a dynamic that is pushing central banks and sovereign wealth funds away from U.S. Treasuries and toward bullion.

“It’s no surprise to me,” Dalio said in a conversation with WSJ Leadership Institute chief Alan Murray. “The mechanics are very clear.”

Debt cycles, governments, and the limits of money printing

Dalio framed the current moment through the lens of long-term debt cycles, a concept central to his macroeconomic thinking. The basic rule, he argued, applies equally to individuals and nations — with one critical difference.

“When you have very little debt relative to your income, you can increase it and it’s not a problem,” Dalio said. “But the more debts and debt service you have, then it squeezes out your spending. That’s when you start to get into financial problems.”

Unlike households or companies, governments can print money to meet obligations. But that flexibility does not eliminate risk — it simply shifts it.

“There’s a supply-and-demand dynamic,” Dalio said. “One man’s debts are another man’s assets. If you’re holding those bonds, you expect a real return. Otherwise, why hold them?”

With global debt levels surging and governments issuing ever more bonds, Dalio posed a simple question: who, exactly, wants to absorb that supply?

From trade wars to capital wars

Dalio warned that rising geopolitical tension has added a new layer of risk to global capital flows, particularly for countries holding large amounts of U.S. dollar–denominated debt.

“We talk a lot about trade wars,” he said. “But you can also have capital wars.”

In an increasingly fractured world, Dalio said, investors must consider the political vulnerability of their assets.

“If you were China, wouldn’t you worry about sanctions?” he asked. “And if you’re the United States, there’s a risk that your debt isn’t bought.”

That shifting risk calculus, Dalio argued, is now clearly visible in official reserve data.

Central banks pivot toward hard money

“What you’re seeing now is a change in central banks’ holdings,” Dalio said. “They’re moving to gold. Gold is now the second-largest currency.”

According to Dalio, the rise in gold prices is not driven by speculation but by sovereign demand. Central banks and sovereign wealth funds, he said, are increasingly viewing bullion as a safer form of money in an era marked by debt overload, sanctions risk, and geopolitical confrontation.

“Why is gold going up?” Dalio asked. “Because that is the safer kind of money.”

The shift reflects a broader loss of confidence in fiat currencies — particularly those tied to heavily indebted governments.

‘Connect the dots’

Dalio expressed frustration that markets and policymakers continue to treat recent developments as isolated shocks rather than symptoms of a larger historical pattern.

“It’s shocking to me that people wake up every day, read the news, and are surprised by things that have never happened in their lifetime,” he said. “Connect the dots.”

Gold prices have risen roughly 67% over the past several years, Dalio noted, a move he views as entirely consistent with past periods of monetary stress.

“We’ve been through this before,” he said. “Who are the buyers? What’s happening domestically? This is the real story.”

Gold as money, not a trade

Dalio has repeatedly emphasized that gold should be understood as money rather than as a speculative asset. In an October LinkedIn post, he argued that investors should typically hold between 5% and 15% of their portfolios in gold — and potentially more during periods of war or currency debasement.

“It seems to me indisputably true that gold is a money,” Dalio wrote, “and it is the money that is least at risk of being devalued or confiscated.”

Throughout history, Dalio noted, monetary systems have oscillated between asset-backed currencies and fiat systems. Both eventually fail when debt levels grow too large.

Before the rise of central banks, countries tended to defend gold pegs at the cost of deflation and depression. In the modern era, central banks have chosen the opposite path — printing money, inflating away debt, and devaluing currencies.

“In both cases,” Dalio said, “big debt and monetary breakdowns followed.”

Why gold keeps surviving

Since the collapse of the Bretton Woods system in 1971, all major currencies have been fiat. Dalio said historical episodes of fiat breakdown are therefore especially relevant today.

“In such cases, central bankers always created a lot of money and credit,” he wrote. “That led to higher inflation and higher gold prices.”

Gold’s appeal, he added, lies partly in its resistance to confiscation and political interference.

“It doesn’t depend on someone paying you,” Dalio said. “And it’s harder for governments to take from you.”

During periods of monetary crisis, war, or sanctions, gold has consistently preserved purchasing power — not by rising dramatically in real terms, Dalio argued, but by failing to collapse when paper money does.

A strategic allocation, not a bet

Dalio said his approach to gold differs sharply from that of most investors, who tend to trade it tactically.

“I look at gold like any other asset,” he said, evaluating expected returns, correlations, liquidity, and risk within a broader portfolio.

For most investors, Dalio argued, gold should be treated as a strategic allocation rather than a market-timing tool.

“When people ask me whether they should buy or sell gold because they think it will go up or down, that’s the wrong question,” he said. “The first question is how much gold you should own.”

For Dalio, the answer remains consistent: some exposure is essential.

“Most investors don’t own any,” he said. “That’s a mistake.”