"I'd Rather Hold Gold than Dollars"
Turning the gold-buying TV ads upside down...
PAUL MENDELSHON, chief investment strategist at Vermont-based Windham Financial Services, began shifting out of his lucrative stock-market positions and into commodities early this summer, reports Hard Assets Investor.
Here, HAI asks Mendelsohn about the reasons for his shift of focus from stocks to commodities, and what his forecasts are for 2010...
HardAssetsInvestor.com (HAI): Which commodity sectors are you primarily focused on right now?
Paul Mendelsohn, CIS, Windham Financial Services (Mendelsohn): We're specialized on Gold and silver right now, because we think that's the area that will benefit the most. Iron ore, nickel and other commodities are more econ-related, as opposed to inflation- or declining-Dollar-related, so they form just a side position for us. We have also focused a little on the CRB Commodity Index overall, and the CRB Agricultural Index.
HAI: Will agricultural commodities begin to outperform soon?
Mendelsohn: I've been reading a lot of stories saying that it's been very wet in the Midwest, and as such, there's been trouble bringing in corn harvests. I would think if the Dollar declines further, then agricultural commodities – along with virtually anything denominated in Dollars – should do well.
HAI: What commodity positions are you hedging, and how?
Mendelsohn: I've been doing a lot of [call] option writes vs. Gold Mining stocks just to protect me. So where I've been buying a gold miner that's moved a lot, I give myself some protection. Typically, I'll sell a March call option at a 9-and-a-half to a 10 percent premium [to today's price].
HAI: Are you more heavily invested in commodity ETFs or stocks right now?
Mendelsohn: I do both. I cannot recommend particular securities or funds, but among others, I own the GDX, SLB, GLD, DBA, DBC, Barrick Gold and Pan American Silver. I own a lot of the stocks of the miners, and on the other side, I have a combination of industrial materials companies as a kind of investment overlap.
HAI: Many money managers are concerned that the volatility in commodities will lead the sector to under-perform next year. Do you share these concerns?
Mendelsohn: No. Gold has been moving very nicely, and it is exactly where I want to be right now. I listened to Bernanke on Monday and he's saying the same things Greenspan said. Greenspan has acknowledged that there was something wrong with the way he viewed the world when he was Fed chairman, but Bernanke is doing nothing that Greenspan didn't. He's setting the stage to build the next bubble. He's speeding the car up and then suddenly jamming on the brakes, instead of having a nice steady monetary policy that takes the future into account. There are too many extremes in monetary policy for me to be concerned about owning commodities right now.
It's like that gold commercial that's on right now that asks: "If you had $50,000, would you rather hold it in gold or in Dollars?" The answer is simple: I'd rather hold Gold! Right now both equities and commodities are performing very well, which is unusual. That's because the Fed is flooding the system with so much money, that it is going in all sorts of directions. I find it interesting that none of the cash is going to the consumer, but to banks to speculate with.
HAI: If Bernanke is creating an asset bubble though, couldn't that still result in stocks outperforming hard assets and commodities in general?
Mendelsohn: It's true that commodities is just one of the places the asset bubble will be, but don't forget you want to participate in an asset bubble when it's going on in the safest way. Right now, Bernanke is creating a bubble in all asset classes. I came into this business in the '70s – today I hear people say inflation is good for the stock market, but that's not true from the history I learned. I hear people saying the Dollar going down is good for the stock market: Again, not from the history I learned. Long term, it's not a good strategy to destroy your Dollar and build a bubble. If that happens, then one day people wake up and say, "These paper assets are not worth anything. I want tradable hard asset like gold, crude or agricultural products."
HAI: How about clean tech companies? Could they trump miners with all the recent environmental-related policy initiatives?
Mendelsohn: No, because if China needs oil or energy to build its infrastructure, then it needs someone to scour world drilling and exploring for hard assets. On the other hand, if China needs a windmill, they can just build it themselves. Although it is nice to think that the world is waking up to alternative energies and fuels, the market has still to wake up to many of these companies. They are actually under-performing relative to miners right now.
HAI: There have been concerns recently that an oversupply of oil in the US might make it overvalued. What's your view on crude?
Mendelsohn: Oil is very tied to the economy, and right now, everyone is bullish on the economy. People in the investment community are talking about an incredible 2010, but I have trouble envisaging that. You look at recent GDP growth and you say, "What's the real benefit to the economy here?" We have GDP growth for the sake of GDP growth, and that's what's been driving crude here.
On the other hand, China is growing at a nice percentage and has continued demand, and that will make up for American weakness. We are sort of going to be out on our own a little bit. So while we will remain weak, India, China and other developing countries will continue to demand crude; as the Dollar goes down, oil will continue to become more valuable, too.
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