Gold vs. the S&P 500 Index: Is There a Message Here?

Something that I watch all day long, and something on which I never see any market commentary  - even on goldbug websites - is the price spread between gold and the S&P 500 Index.  For purposes of illustration, I use the front-month gold future contract, which is April, and the March SPX contract. 

On Friday, April gold was $1081 when the stock market opened and $1081 when the stock market closed.  At the open, there was a $10 spread between Apr gold and Mar SPX, with Mar SPX $10 higher than gold. By the close of the stock market, the Apr gold/Mar SPX spread had reversed and closed with Apr gold $12 higher than Mar SPX.  Gold significantly outperformed the stock market during that incredible reversal sell-off in stocks Friday. 

Currently, the spread has continued to widen, with Apr gold $23 higher than Mar SPX.  This same spread action occurred at the end of October '09, when gold was trading roughly even dollar, and the spread widened out to $115 by the time gold hit an interim price peak at $1220.

Are we seeing gold beginning to be used as a flight to safety vehicle?  Friday's spread action for sure would indicate that is a possibility.  To be sure, I need to see how gold behaves going forward on a few more days in which the SPX sells off.  I will say that we know several facts which can be observed in the market:

1)  The premiums being paid for physical gold in Asia/India continue to persist and, in some cases, have widened considerably during this sell-off in gold.  This is the unmistakable sign of aggressive demand and growing tightness of supply in the physical market.

2)  There have been persistent accounts from several sources about a growing shortage of physical supply of gold bullion in London, evidenced by reports of delivery delays and offers by those required to deliver to settle in cash at substantial market premiums.  It will be interesting to see how this plays out.

3)  The options for big investors to park large amounts of money risklessly have become very limited.  Obviously there is a high degree of risk in bank CDs and commercial paper.  The SEC just issued a ruling that allows money market funds to restrict withdrawals which, in effect, makes that instrument a lot more risky if you want 100% liquidity.  30-day T-bills are now persistently exhibiting negative yields, indicating the market's willingness to pay a small fee to insure 100% liquidity (in the worst scenario, the Govt can always print money to redeem T-bills).

4) Then there's gold...I am hearing reports now that big foreign money is ignoring George Soros and starting to move cash into gold.  Are these reports true?  I don't know, but I do know the gold/SPX price spread definitively supports that thesis, at least for now.

What I do know for sure is that, with gold, I don't have to worry about the SEC restricting my sales of gold, I don't have to worry about a bank CD or commercial paper issuer defaulting, and I don't have to worry about dollar devaluation when the Fed has to print more money to pay off maturing Treasuries.  In fact, the value of my gold increases against the dollar as the latter occurs.  Finally, I can take my gold anywhere in the world and find buyers.  That is not true with U.S. dollar investments.