Ray Dalio says gold will be a top investment during upcoming 'paradigm shift' for global markets

Hedge fund kingpin Ray Dalio is seeing a case for gold as central banks get more aggressive with policies that devalue currencies and are about to cause a "paradigm shift" in investing.

Dalio, founder of the world's largest hedge fund, wrote in a LinkedIn post that investors have been pushed into stocks and other assets that have equity-like returns. As a result, too many people are holding these types of securities and likely to face diminishing returns.

"I think these are unlikely to be good real returning investments and that those that will most likely do best will be those that do well when the value of money is being depreciated and domestic and international conflicts are significant, such as gold," the Bridgewater Associates leader said.

"Additionally, for reasons I will explain in the near future, most investors are underweighted in such assets, meaning that if they just wanted to have a better balanced portfolio to reduce risk, they would have more of this sort of asset. For this reason, I believe that it would be both risk-reducing and return-enhancing to consider adding gold to one's portfolio. I will soon send out an explanation of why I believe that gold is an effective portfolio diversifier."

The price of gold jumped higher amid Dalio's publishing of the post, most recently up 0.7% around $1,421 an ounce.

Dalio's call comes two weeks before the Federal Reserve is expected to cut its benchmark interest rate by at least a quarter point. That move comes after a three-year cycle of raising rates from the historically accommodative near-zero levels implemented during the financial crisis.

The fresh trends are part of what he labeled a new "paradigm shift" that comes after the last one during the crisis. Investors, Dalio said, are going to need to change their mindset about what will work after the longest bull market run in Wall Street history.

"In paradigm shifts, most people get caught overextended doing something overly popular and get really hurt," he wrote. "On the other hand, if you're astute enough to understand these shifts, you can navigate them well or at least protect yourself against them."

Since the crisis, the Fed and many of its global counterparts have been holding interest rates low and using policies like quantitative easing, or the purchase of bonds and other financial assets, to boost risk-taking which in turn has helped holders of financial assets.

During that time, the amount of corporate and government debt has surged, putting central banks in the position of needing to keep interest rates low. The Fed embarked on a program where it tried to normalize policy, but now is expected to shift back into easing mode as it cuts rates and halts the reduction of the bond holdings on its balance sheet.

"To me, it seems obvious that [central banks] have to help the debtors relative to the creditors. At the same time, it appears to me that the forces of easing behind this paradigm (i.e., interest rate cuts and quantitative easing) will have diminishing effects," Dalio wrote.

"For these reasons, I believe that monetizations of debt and currency depreciations will eventually pick up, which will reduce the value of money and real returns for creditors and test how far creditors will let central banks go in providing negative real returns before moving into other assets."

Dalio added that he is uncertain of the timing for the shift but he thinks "it is approaching and will have a big effect on what the next paradigm will look like."