Sell Gold; Buy Base Metal Miners and Mid-Cap E&Ps: Rady

09 November 2011 - Yahoo! Finance - Jeff Macke 

"Gold is not the the safe haven that everybody makes it out to be," says Harry Rady, CEO of Rady Asset Management 

In fact, he says, gold is just like copper, wheat or pork bellies or any other commodity, only with almost totally arbitrary pricing. You gold bugs up in arms yet? If not, you're about to be.

"Investors are willing to invest in gold at any price with the assumption that it'll go up forever... just like housing" (emphasis added). Gold investors are playing a "dangerous game of musical chairs," he contends.

Rady has shorted gold via the SPDR Gold Shares (GLD) ETF, but he has no position at the moment.

What he is doing is building extensive positions in industrial commodities via their producers. Consistent with his view that the woes of the global economy are overstated, Rady is loading up on Stillwater Mining (SWC) and North American Palladium (PAL), miners of platinum and palladium, respectively. According to Rady, the reality is that these metals have "limited supply, and global miners are struggling to produce." Because of the perception of the markets, these particular stocks have been beaten senseless, enabling investors to buy proven reserves at pennies on the dollar and getting probable reserves for free.

With economic risk already discounted (Stillwater is down about 60% from its 2011 highs), he sees low double-digit downside risk with the chance for each stock to be "doubles or triples over the next two or three years." Rady's M.O. is to get long stocks near their 52-week lows, giving him a potential embarrassment of riches with the miners, which, despite their recent vigorous rallies, are still closer to their bottoms than their old highs.

Another group Rady likes are mid-cap exploration and production (E&P) companies. The asset manager sees players in the E&P space with dominant positions in regional markets as takeover targets for Big Oil. "Nobody is going to acquire Exxon Mobil (XOM)," he says, but with values at 50 cents on the dollar, an acquisition of these relatively small operations would be ideal for bigger fish who "want to improve their positions in these very prolific plays."

For Rady's money, as well as that of his investors, the most prolific names in the group are Penn Virginia (PVA) and Carrizo Oil & Gas (CRZO).

Mutual Funds involve risk including possible loss of principal. ETFs are subject to investment advisory and other expenses, which will be indirectly paid by the Fund. As a result, the cost of investing in the Fund will be higher than the cost of investing directly in ETFs and may be higher than other mutual funds that invest directly in stocks and bonds.  When the Fund invests in foreign securities through ADRs, the Fund could be subject to greater risks because the Fund's performance may depend on issues other than the performance of a particular company or U.S. market sector.  Stocks of mid-cap companies may be subject to more abrupt or erratic market movements than those of larger, more established companies or the market averages in general.  The Contrarian Value Long Short Fund has the same management practices and is in all material respects identical to the predecessor Limited Partnership and is managed by the same portfolio manager since the predecessor limited partnership's inception on February 2007. The Fund's investment goals, policies, guidelines and restrictions are, in all material respects, equivalent to the predecessor limited partnership. From its inception date, the predecessor limited partnership was not subject to certain investment restrictions, diversification requirements and other restrictions of the 1940 Act of the Code, if they had been applicable, it might have adversely affected its performance. In addition, the predecessor limited partnership was not subject to sales loads that would have adversely affect performance. Performance of the predecessor fund is not an indicator of future results.