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The global macro facts in the rear view mirror are what they are at this point – crystal clear. We are thankful to have carried both a long position in gold (up until recently - we shorted gold this week), and a 46-86% position in US Dollars over the course of the year in our Asset Allocation Model. As prices and expectations change, we do – and we think this Safety Trade is finally peaking.

For 2009 YTD, gold is up over +13% and the SP500 is down -14.8%. Alongside US centric equity portfolio deflation we have a continuation of the nasty year over year deflation in both US real estate prices and the overall Commodities Index (CRB Index is down -12% for the YTD). In the face of pervasively bearish deflation and US Financial media sentiment, the US Dollar has “re-flated” +7% for the YTD.

Calling the next big asset class move from here is going to be a critical differentiator for this year’s performance. The world is now being soaked with government issued liquidity and, as a result, we are finally starting to see risk spreads narrow and premiums on corporate bond yields dampen. Looking at this chart below, you can see that there has been a 150 basis point drop in those freak-out bond yields you saw during the October/November. Despite this, gold is raging to higher highs?

Either gold is signaling that bond yields and risk spreads are going to blow out to those October/November highs, or the whole wide world of underperforming wealth managers who are now fire engine chasing this relative performance trade in cash/gold are teeing themselves up to get tagged.

We have seen this movie before – remember that black stuff called oil that kept chugging higher despite the fundamentals of oil supplies rising in the face of slowing demand? The only demand that remained (at the top) was that of the incremental asset allocator getting sucked into the vortex of the “its different this time” peak…

There has always been a baseline of demand for gold – we know this. We have been bullish on gold since 2005, and we still can be if we see a lower price. However, right here and now is where we get paid to manage risk - with the TED Spread trading 96 basis points wide (vs. Oct/Nov 400-500 bps), and both corporate bond yields and spreads narrowing sequentially vs. Q4 of 2008, the question is – is the speculation of the momentum trading community signaling a peak in the Safety Trade?

Everything has a time and a price. We think that the answer to that question, for the immediate term “Trade”, is yes.

Keith R. McCullough
CEO / Chief Investment Officer