Today we saw continuing defensive repositioning on the heels of the Philadelphia Fed’s dismal manufacturing report fueling a continued climb in the price of gold and, paradoxically, a feeding frenzy for US Treasuries pushing the 10-year yield to under 2% at one point (this is rightly viewed less as a vote of confidence in the US economy and more as a flight to the only other store of massive liquidity).

Clearly the market is preparing itself for the worst, namely a return to recession in the major developed economies and at least a significant weakening of prospects for emerging economies. While we still believe somewhat anemic growth is the more likely outcome, it has to be recognized that the threat of negative GDP growth has increased and for a natural resource equity fund such as ours there’s little escaping a certain amount of pain along the way.

It’s hardly a surprise that commodity prices have fallen in recent weeks given downgraded projections of global growth, but the retreat in natural resource equities has amplified these losses. In a debt/liquidity crisis like this we’re accustomed to advising people to own physical assets or, in the case of equities, companies with physical assets. History tells us that at some point resource prices reflect a new reality and the disparity between market capitalization and real value springs back decisively and dramatically.

Today you can buy an ounce of gold bullion for over US$1800 an ounce or you can buy shares in almost any major producing gold company providing exposure to an ounce of gold for something closer to US$500 per ounce.

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