Ray Dalio Year-End In-Depth Review: The Logic Behind the Dollar Depreciation and the Rise of Gold

Author: Ray Dalio

Translation: Deep潮TechFlow

As a systematic global macro investor, as 2025 comes to an end, I can’t help but reflect on how the markets operated this year. Today’s reflection centers around this very topic.

Although facts and return data are indisputable, my view of the markets differs from most people. Most believe that U.S. stocks, especially those related to artificial intelligence, are the best investments of 2025 and the biggest investment story of the year.

However, it is undeniable that the biggest returns (and thus the biggest story) this year actually stem from two main factors:

1. Changes in currency values (especially the US dollar, other fiat currencies, and gold);

2. The performance of U.S. stocks significantly lagged behind non-U.S. equities and gold (which was the best-performing major market).

This phenomenon is primarily due to fiscal and monetary stimulus policies, productivity improvements, and a substantial shift of asset allocation away from the U.S. market.

In this review, I will analyze the dynamic relationships between currency, debt, markets, and the economy from a more macro perspective, and briefly explore how politics, geopolitics, natural events, and technology—these four forces—affect the global macro landscape within the context of the “Big Cycle” evolution.

First, let’s discuss the changes in currency values: in 2025, the USD depreciated by 0.3% against the JPY, by 4% against the CNY, by 12% against the EUR, by 13% against the CHF, and by 39% against gold (which serves as the second-largest reserve currency and the only major non-fiat currency).

In other words, all fiat currencies depreciated, and the biggest market story and volatility of the year came from the fiat currency that depreciated the most—the weakest currency—while the strongest “hard currency” performed the best. The top-performing major investment in 2025 was gold, with a USD-denominated return of 65%, outpacing the S&P 500’s USD return of 18% by 47%.

In other words, from the perspective of gold, the S&P 500 actually declined by 28%. Let’s remember some important principles related to this:

When a domestic currency depreciates, asset prices measured in that currency tend to appear to rise. In other words, from the perspective of a weak currency, investment returns seem higher than they actually are.

In this context, the S&P 500’s return for USD investors was 18%, for JPY investors 17%, for CNY investors 13%, for EUR investors only 4%, for CHF investors only 3%, and for gold investors, -28%.

Currency fluctuations have a significant impact on wealth transfer and economic operation.

When a domestic currency depreciates, it reduces domestic wealth and purchasing power, making domestic goods and services cheaper in foreign currencies, while foreign goods and services become more expensive in domestic currency.

These changes influence inflation rates and who buys what from whom, but their effects usually have a lag.

Hedging exchange rate risk is crucial.

If you have no foreign exchange positions and do not want to bear exchange rate risk, what should you do?

You should always hedge to the least risky currency basket. If you believe you can make more accurate judgments, you can make tactical adjustments based on that.

However, I will not go into detail about my specific approach here.

Regarding bonds (debt assets), since bonds are essentially promises to deliver currency, when the currency depreciates, their real value declines, even if their nominal prices may rise.

In 2025, the return on the 10-year U.S. Treasury bond in USD was 9% (about half from yield, half from price appreciation), in JPY also 9%, in CNY 5%, but in EUR and CHF it was -4%, and in gold it was as low as -34%.

Cash investments performed even worse than bonds. This also explains why foreign investors are less interested in USD bonds and cash (unless they hedge currency risk).

Although the current supply-demand imbalance in the bond market has not yet become a serious issue, nearly $10 trillion of debt will need refinancing in the future. Meanwhile, the Fed seems inclined to ease policy to lower real interest rates.

For these reasons, debt assets are less attractive, especially long-term bonds, and the yield curve appears to be steepening further. However, I remain skeptical that the Fed’s easing policies will be implemented as heavily as current pricing suggests.

Regarding U.S. stocks significantly underperforming non-U.S. stocks and gold (the top-performing markets of 2025), as mentioned earlier, although U.S. stocks measured in USD performed strongly, when priced in strong currencies, their performance was much weaker and lagged behind other countries’ markets.

Clearly, investors prefer non-U.S. stocks over U.S. stocks; similarly, they favor non-U.S. bonds over U.S. bonds or USD cash.

Specifically, European stocks outperformed U.S. stocks by 23%, Chinese stocks by 21%, UK stocks by 19%, and Japanese stocks by 10%. Overall, emerging market stocks performed better, with a return of 34%, while emerging market USD-denominated debt returned 14%, and local currency debt in emerging markets returned 18%.

In other words, capital flows, asset values, and wealth transfer have shifted significantly from the U.S. to non-U.S. markets. This trend may lead to more asset rebalancing and diversification.

The strong performance of U.S. stocks in 2025 was mainly driven by robust earnings growth and P/E expansion. Specifically, USD-denominated earnings grew by 12%, P/E expanded by about 5%, and dividend yields were around 1%, resulting in a total return of about 18% for the S&P 500.

The “Magnificent 7” stocks in the S&P 500 account for one-third of the total market value, with their earnings growth reaching 22% in 2025. Contrary to common belief, the other 493 stocks in the S&P 500 also achieved a strong 9% earnings growth, making the overall earnings growth of the index about 12%.

This growth was mainly driven by a 7% increase in sales and a 5.3% improvement in profit margins. Sales growth contributed 57% of the earnings increase, while margin expansion contributed 43%. Some margin improvements seem related to technological efficiency gains, but there is no data yet to fully confirm this.

In any case, the improvement in earnings is primarily attributable to the growth of the overall economy (sales), with corporations (and thus capitalists) capturing most of the gains, while workers received relatively less.

Monitoring the distribution of profit margin growth will be crucial in the future, as the market currently expects significant profit margin expansion, while political left forces are trying to secure a larger share of the economic “cake.”

Although it was easier to predict in the past than in the future, understanding the most important causal relationships, developing thoroughly backtested and systematic strategies, and leveraging AI and high-quality data are invaluable. This is how I make investment decisions and the experience I hope to pass on.

Overall, I believe the dynamic forces of debt/money/markets/economy, domestic political forces, geopolitical forces (such as increased military spending and its financing), natural forces (climate change), and new technological forces (like AI costs and benefits) will continue to be the main drivers shaping the global landscape. These forces will largely follow the big cycle template I proposed in my book How Countries Go Broke: The Big Cycle.

Due to length constraints, I will not delve deeper here. If you have read my book, you should understand my view of the evolution of big cycles. If you want to learn more but haven’t read it yet, I recommend you do so as soon as possible. It will help you better understand future market and economic trends.

Regarding portfolio allocation, although I do not want to be your investment advisor (meaning I do not want to tell you exactly what positions to hold and have you copy my advice), I do hope to help you improve your investing. While I believe you can infer my preferences for certain types of investments, the most important thing for you is to develop the ability to make independent investment decisions. Whether it’s judging which markets will perform better or worse, building a solid strategic asset allocation and sticking to it, or selecting fund managers who can deliver good returns—these are key skills you need to master.

If you want advice on how to do these well and succeed in investing, I recommend you take the Dalio Market Principles course offered by the Wealth Management Institute of Singapore.

Note: Since Q4 earnings reports have not yet been released, related data are estimates.

Note: When these factors decline, they exert upward pressure on stock prices.