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

Jeff Macke

"Gold is not 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).

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