New York, NY...The gold price is trading at fresh record highs as investors continue to accumulate exposure to the price of gold against a backdrop of plunging government bond yields. Gold hit a high print of $1,170.10 per ounce this morning and COMEX gold futures looked set to rise for the fifteenth time in the last sixteen trading sessions - a phenomenon that has never occurred. The U.S. dollar resumed its decline this morning as government yields continued to offer meager returns. The three-month Treasury bill yields a paltry 0.01% and actually traded at a negative interest rate last week - banks actually paid the... government to hold their money. The two-year and three-year Treasury bills yield a mere 0.74% and 1.27%, respectively. It is difficult to reconcile the prospect of an economic recovery with such incredibly low yield levels. However, with bank lending contracting, unemployment stubbornly above 10%, and foreclosures rising, deflation remains the top concern of policymakers. Last Wednesday, November 18, Federal Reserve Bank of St. Louis President James Bullard hinted that the Fed may not raise interest rates until 2012. In the same speech, Bullard discussed the issue of how to avoid inflation while managing the $1.72 trillion in asset purchases. Policymakers will continue to err on the side of easy policies - and the macro-economic backdrop for the gold price will remain bullish. The gold price has historically been forced to compete with much higher-yielding money market accounts and short- to intermediate-term Treasury bills. The credit crisis and accompanying recession have driven down yields and reduced the opportunity cost of holding gold to negligent levels. With spiraling deficits, reaching $1.4 trillion in the most recent fiscal year, and debt to gross domestic product levels exceeding those of the Great Depression era, gold has re-emerged as a store of value. In addition to a macro-economic backdrop, two congressional proposals making their way through Congress have added to the downward pressure on the dollar and helped propel the gold price higher. The first is a health care bill with a public option. Without debating the merits of universal health care, the government has proved its propensity to expand its bureaucracy and bleed red ink - a situation that has the potential to add significantly to the federal deficit in spite of the promised cost savings proclaimed by the bill’s supporters. The second proposal, sponsored by Representative Ron Paul of Texas, would allow Congress to audit the Federal Reserve. Again, without debating the merits of the proposal, reducing the Fed’s independence and giving Congress a more active role in monetary policy has the potential to make easy money a permanent fixture. With Congress a political body that is forced to run for re-election to keep their jobs, the pressure from constituents for benefits is unending. Their incentive to audit tighter policy, should that day ever come, would be much higher if their constituents back home are struggling and a more hawkish Fed emerges. Record-setting gold prices has led to increased interest in gold mining stocks - a sector that in aggregate is smaller than the market capitalization of Exxon Mobil. The Market Vectors Gold Mining ETF (GDX) has appreciated exactly 50% thus far in 2009 and 19.9% in November alone. Gold mining stocks are not the only market sector to see significant appreciation this year, as the weak U.S. dollar has been a tailwind for a host of asset classes. The Reuters-Jefferies CRB Index is up 19.6% this year, with crude oil up 72%. Emerging market equities have been on a tear with China’s Shanghai Composite, Brazil’s Bovespa, and India’s Sensex up 81.7%, 76.6%, and 76.4%, respectively. The correlations between the U.S. dollar and the gold price have always been high, but over the past year, the correlations amongst both domestic and foreign equities have risen dramatically. This fact has led many to speculate that the dollar carry trade, in which investors borrow U.S. dollars to purchase higher-yielding currencies and equities, is the single most important factor driving global asset markets. The popularity of the short dollar trade has led some market commentators to worry about the possibility of a big short squeeze. John Mauldin, in his recent weekly letter penned, “Everyone is now on the same side of the boat. They have borrowed dollars to buy other risk assets, assuming that the dollar, like the yen in the glory days of the yen carry trade, will continue to fall. Dollar bears are everywhere.” Supporting Mauldin’s case is the sentiment backdrop for the anti-dollar - the gold price. A record 97% of futures traders reported being bullish on the gold price according to MBH Commodities, representing the highest two-day reading since the organization began keeping this data in 1987. Additionally, Mark Hulbert’s Gold Newsletter Sentiment Index show the average recommended gold exposure from gold market timers sits at 68%, the highest level since March of 2008 - a peak that was followed by a 15.5% correction and an 18-month consolidation. While the risk of a counter-trend rebound in the U.S. dollar and a corresponding decline in the gold price and gold mining stocks has risen, the macro-economic backdrop remains supportive. As long as central bankers and congressmen focus their efforts on fighting deflation, then the outlook is bullish for higher gold prices.

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