Cautionary Words From Adrian Ash

Adrian Ash can't be pegged as a gold-hater. The head of the research desk at BullionVault, he was the London correspondent for the Daily Reckoning between 2003 and 2007. If he can be pegged as anything, it would be as an old goldbug. So, his doubts about th continuance of the gold market mean more that the bubble's-gonna-pop crowd's.

In his "When Gold Bullion Fails," he's thinking ahead. The centrepiece of his commentary is wonderment about the concurrent bull market in gold and U.S. Treasury bonds. Normally, they'd be inversely correlated - but not so for the last decade. Money printing explains some of it, but not the early part of the gold bull market. (On the other hand, gold snapping back from woeful undervaluation does.) Using gold and T-bonds as a pairs trade has been an easy way to make money over the past several years; times are good for the hedger when both sides of a hedged trade rise.

He ends with a note that equities are overvalued based upon historical market P/E quintiles; right now, the S&P is in the top quintile. The only deep contrarian investment that's easily visible is real estate. Gold may keep going until equities become deeply undervalued and widely shunned, as they were in early 1982.


Those qualms relate more to hedge trading than gold itself. The fact is, the T-bond and gold hedge has been near to a sure thing. Even during the crisis of '08, gold's mini-bear market was countered by a sharp rise in T-bonds. Stocks versus gold has made for a worse hedge, thanks in large part to that same crisis, but even now stocks are overvalued and gold is high. As for cash, it's been paying so little that it might as well be gold.

Call it a contrarian fancy, buut I think times are going to be tougher for asset-class hedgers in this decade. The flipside of both sides of the pairs trade going up are both sides going down. We're not at the point where the gold-bonds hedgers will be slaughtered - it would take a blow-off bubble in gold for that scenario to be made real - but a reversal of good fortune isn't unthinkable.

While I'm on the subject: a gold-stocks pairs trade worked quite well from 1982 to 1987. Gold went from a $300 low to a nearly $500 high in that timeframe, while the Dow tripled from low to high. The Crash of '87 put the kibosh it as a sure thing, but it worked out fairly well subsequently. Eventually, pairing gold with the S&P 500 will be a real winner - but that would have to await the post-blowoff bear market.