The world of commodity investing has been put under the microscope as investors have steadily begun to add hard asset exposure to their portfolios. Recent years have seen commodities like gold take the fast track to a number of individual and institutional portfolios, as many investors favor the asset over the long term. We recently had the opportunity to speak with John Hummel, CIO of AIS Group
, about gold and commodities in today’s environment. Mr. Hummel manages $400 million for his clients and currently holds a substantial position in gold, including holdings in the ultra popular SPDR Gold Trust
Commodity HQ (cHQ):
How did you get involved in the commodity industry?
John Hummel (JH):
I have been in the business for about 40 years, but I began in traditional advisory work, which we still do at AIS Capital Management. Brad Stern and I started AIS in 1992 after meeting at Cowen Asset Management, and we do a great deal of work on the relative performance of asset classes – for example, gold relative to the S&P 500
or bond markets. We do this because we think relative asset performance is very informative.
Why do you favor gold right now?
When relative strength or weakness starts to develop in an asset class, that trend can continue for years, sometimes even a decade or two. We are pragmatic opportunists, not gold bugs, and we look for low risk opportunities. After 2001 and 2002, we saw that gold began to develop relative strength again. We also look at real interest rates and technical factors when investing, but relative strength is really a key ingredient for us.
Do you have a timeline for how long you think this strength will last?
It’s impossible to really know how long a trend can go, but we have gone on for roughly 11 years this way and we aren’t seeing any evidence of gold’s bull market
ending soon. Based on our experience with other bull markets, we believe the second phase of this market has yet to come. The second phase could become more exaggerated, maybe even hyperbolic, but it’s hard to know when or how far.
How do you respond to the idea that gold is in a bubble or that it is being over bought?
The real bubble is in government debt and spending. The price of gold is merely responding to decades of rapid growth in government debt and paper currency reserves.
What do you think of the SPDR Gold Trust? It seems to get a bad rap from some investors.
When we started our first strategy in 1992, the only way to invest in gold was through the bullion, and we still do invest in the physical gold for some large accounts. As storing and investing in gold became more expensive, we started investing in ETFs like GLD or in futures contracts for smaller accounts. As far as the accusation that GLD doesn’t have the physical gold, our research suggests otherwise.
Why is QE3 such a major development for gold investors?
We think this past September in the United States was much like August 1971 when Nixon closed the gold window. Even the ECB is moving from the hard money banking system to a model like the Federal Reserve that is much more actively managed. What is significant about this round of quantitative easing is that it is open-ended – all we have heard from the Fed is talk about reducing unemployment with no mention of lowering inflation. Bernanke outlined this plan during a speech in 2002 – he believes that if the central bank creates so much money people will start to get that we have to spend it, and I think it will work. There are a lot of skeptics and it may be a bumpy road, but I think that after four years of the market bottoming out, we will see higher housing prices, growing mortgage lending, and easing of banking regulations.
Any tips for new commodity investors?
The economic growth that is occurring in the developing world is the engine of growth, unleashing entrepreneurialism and a growing middle class. These economies are commodity intensive at this point, which will add stress to resources like oil, grains, and meat production. The money creation of developed banks is also feeding this emerging growth; overall it’s a good time to be in commodities.
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Editor's note: This article by Jared Cummans was originally published on Commodity HQ.
No positions in stocks mentioned.