MAY 5, 2011, 1:46 P.M. ET.

Xerion's Arbess Calls Gold 'One-Trick Pony'

By Alistair Barr

SAN FRANCISCO (Dow Jones)--Gold is a "one-trick pony," and industrial commodities are a more versatile play on both monetary debasement and the rise of emerging markets, said Daniel Arbess, head of the $3 billion hedge-fund firm Perella Weinberg Partners Xerion Capital on Thursday.

Gold and silver have surged in recent years as hedge funds and other investors piled into the precious metals.

Hedge funds have been drawn to gold for two main reasons. Some have built a position as a so-called tail-risk hedge -- if there's another financial crisis or some other big negative event, gold may be a haven. Others, like Paulson & Co., have been drawn to the metal as an alternative currency on concern the U.S. dollar will lose value.

Gold, though, has fallen recently, and silver has also slumped.

Soros Fund Management sold much of its investment in the precious metals in the past month, the Wall Street Journal reported this week.

Higher margin requirements may also be driving silver prices lower. But gold may be losing some of its tail-risk appeal as concern about financial instability wanes.

"Systemic tail risk has been less of a worry lately," Osvaldo Canavosio, a hedge-fund analyst at Man Investments in New York. "The view on the U.S. dollar has been behind gold positions recently."

Arbess has been a proponent of holding precious metals. But he's more interested in other commodities.

"Gold and to a lesser extent silver are a one-trick pony," Arbess said in an interview with MarketWatch. "It's very difficult to establish their intrinsic value other than as a barometer of investor concern about financial instability."

"If one is really worried about monetary debasement but also wants to have an investment that would perform well when concern over financial instability subsides, one is much better off in industrial commodities and related investments," he added, citing large-cap mining companies that mine copper, iron ore and coal as examples.

Fundamental commodity managers have been more involved in platinum-group metals including palladium lately, Canavosio said. These metals are considered precious, but they also have industrial uses -- to a greater degree than does silver, he explained.

In a presentation to investors this month, Arbess said the Federal Reserve's purchase of Treasury bonds and other assets has created more dollars that are chasing the same supply of nonrenewable resources, pushing commodity prices higher.

At the same time, rising demand for "hard assets" in China and other developing nations is also boosting commodity prices, according to the presentation.

"Industrial commodities are far more versatile as a portfolio 'straddle' because they will benefit as both a monetary alternative/financial hedge and continuing strong fundamental demand from urbanizing, growth markets," Arbess said.

Still, the Xerion manager is keeping precious metals in his funds.

"We do have gold in our funds and also some silver," he told MarketWatch. "We have been trading silver through the recent volatility."

"Precious metals can become overbought or oversold by short-term traders," Arbess added, "but we see a sustained place for them in investors' portfolios as a hedge against financial instability and monetary debasement associated with the ongoing rebalancing of the global economy."

-By Alistair Barr; 415-439-6400; AskNewswires@dowjones.com

http://online.wsj.com/article/BT-CO-201 ... 16458.html