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I want to be very careful about using someone as smart as Dr. Hussman as a contrary indicator, but... from this week's Market Comment:

On last week's rally in precious metals shares, we clipped our exposure further, to just about 5% of assets. This is about our lowest allocation to precious metals shares since the Strategic Total Return Fund's inception in 2002. Meanwhile, given recent weakness in the euro and British pound, we added an allocation of about 10% of assets to foreign currencies. My impression is that commodity prices and the U.S. dollar will become less correlated in the months ahead. Though commodity prices are still in a frothy blowoff (making the ultimate highs uncertain), I do expect that we will observe a standard, run-of-the-mill, predictable, routine, and I-can't-believe-investors-don't-see-it-coming-a-mile-away commodity price “spike top” over the next few months or even weeks (stare at some historical charts), off of which prices are likely to decline with very little in the way of relief rallies. At the same time, further dollar weakness is likely as the U.S. economy slows and our need for foreign capital persists. As the decline in commodities in terms of “global” prices will probably be faster than the decline in the dollar, U.S. investors are likely to observe an unusual pattern of weakness in both commodities (as priced in U.S. dollars) and the U.S. dollar itself.

I disagree strongly to say the least. It appears Dr. Hussman has been holding PM shares in his bond fund (a very sane and well run bond fund by the way) as a hedge against rising commodities but given their underperformance, I am left to wonder why? If the play was to neutralize the huge rise in commodities, then why not own the likes of USO, UNG, oil & gas stocks and base metals miners instead of precious metals miners?

I will take it as a positive (for the precious metals sector) that Dr. Hussman is liquidating due to perceived economic contraction and an associated commodity sell off to come. I agree with the commodity sell off part but if this smart cat is selling PM shares then so are a LOT of smart fund managers and players. The good Doctor is dumping his debased dollar hedge while projecting a lower dollar. With the financial markets destined to take another hit sooner or later and gold poised to take center stage in the realm of the monetary, I believe this is a tragic decision. But his Total Return Fund is a bond fund, not a stock fund so perhaps he has other reasons factored in as well. This bond fund will do well in a contractionary environment with associated deflation scare. But the play here, for me anyway, has always been to get fully long the gold (and to a lesser extent silver) miners in the environment when commodities are likely to top out and mechanics are in motion for future debasement of the currency. Are the Euro and BP the answer? I think not.

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