VIDEO: Wall Street Veteran on How to Play Gold and Bitcoin Now

On October 9th, 2024, TheStreet Pro's Maleeha Bengali joined TheStreet's Conway Gittens on the floor of the NYSE to discuss commodities, crypto, and her view on the US economy. Please enjoy the complete video interview as well as the transcript that follows.

Conway Gittens: Maleeha Bengali is founder of Commodities Capital and she's a contributor to TheStreet Pro. Thank you for coming by. So in September, you wrote a post on TheStreet Pro that said that commodities were screaming a recession. That was September. A lot has happened. We're now in the fourth quarter. What is the message that you're now getting from commodities?

Maleeha Bengali: Thank you for having me on. 

So, the big story for this year was to buy commodities at some point. 

The market is waiting for China to come back with a vengeance, hopefully see a Q4 demand recovery. And that's the whole premise of buying commodities. 

Now, there's a bit of a problem. If you look at the physical markets, that's what we do. You look at oil and gas demand flows and copper or in oil, they all are basically saying demand is very weak. The entire sell-side consensus for every single Wall Street bank is talking about how we can see a massive demand recovery, but the physical markets are not showing it. So there's a disconnect. How much is it built on faith or how much is built on hope? We actually tracked live data 6 to eight weeks in the forward. So we can see demand is not picking up. So either the sell side is wrong, or the commodity markets are wrong, and commodity markets, in our opinion, never lie. They are the actual facts. 

So that's why we've actually been very bearish, whereas the equity guys are actually planning a massive recovery. So that's a disconnect. 

Now, obviously, a lot has happened in the last week between the Chinese market's rally, about 30% They've given about half of that back. That's on the back of some stimulus. Now, we know the Chinese market for the last three years has seen demand in the economy is imploding on the property market crisis President Xi Jinping wants to announce a stimulus measures to promote domestic demand. But this is the other disconnect. If you go back in time, the last 20 years, China's playbook has changed. And that's been our main premise. They're not going to be doing a bazooka stimulus just to promote infrastructure growth or copper demand. They want to promote domestic consumer demand. They want to make sure the actual consumer is getting jobs and surviving. So, most of Wall Street is predicting some sort of a bazooka stimulus. And that's why the markets rallied last week because they just made a headline that we're going to do take some measures, but they didn't come up with anything of substance yesterday. And the markets have crashed 15%. So this is the big dilemma right now as to what China's going to do and what is it doing, and what's priced in by all the banks. And we only have about 2 and 1/2 months left. So, the numbers will need to come down if China doesn't hold on to what they're saying.

Conway Gittens: So going back to my original question, are commodities still telling you, screaming a recession as of today?

Maleeha Bengali: Yes, as of today, because even with the China market rally last week of 30% copper rallied even a few percent, oil actually fell down. So commodities are not rallying. Gold and silver is a very separate topic. But actual commodity related Chinese demand are not seeing what the equity markets are. So we think there was a massive short covering unwind of Chinese shorts. Every hedge fund manager has been short and underweight China. So, that's where the market rallied aggressively. So no, as of right now, my commodity markets are still saying demand is weak, China is not picking up and if anything, supply side is pretty strong. So there's pockets of value, but it's not like in screaming buy across the board.

Conway Gittens: So since commodities are a global market, and you're getting a signal from commodities, is also factoring in China. If you factor out China and you're just trying to extrapolate what's happening in the US, right. What are commodities saying to you about a recession risk in the US?

Maleeha Bengali: So let's talk about the oil market. The oil market is very global market. So let's take China, for instance. Chinese demand this year is down 300,000 barrels per day, where most people expect up 700,000. So that's where the massive disconnect is. US market, the economy is doing pretty well. It's holding up a lot better than expected. But the US oil demand, if you look at gasoline and distillate, is actually quite weak. So when you talk about US economy is very different from the needs or the product markets. So today, we saw gasoline numbers come out. The US consumer is quite strapped right now. Manufacturing is at lows. So you're seeing distillate demand weak, which is leading into an excess of inventories on the oil side. So the oil price is actually falling here. And this is despite OPEC taking about 5 million barrels per day out of the market. So can you imagine what the price of oil would be if we had those excess barrels. So, no, the demand actually is quite muted in the US side, even though the US economy is quite robust.

Conway Gittens: So Goldman Sachs just this week lowered its recession odds to 15% So in your view, there's a disconnect between what economists are seeing and what you're seeing in terms of demand from commodities?

Maleeha Bengali: OK. So the commodity prices, you look at both the demand and supply side. If the demand is weak, but the supply is also weak, then obviously prices will fall. So we've established that demand is weak and muted, but it's not picking up as much as Wall Street expects. Now, going back to the equity market, you are right. Fed Chair Powell has done a great job in boosting the economy right there, cutting rates last month, they cut by 50 basis points when there really wasn't a need to cut because inflation hasn't really come down. It's probably at 2.9%. We'll see tomorrow when the CPI comes out if this is quite pre-emptive and if the Fed is actually political or not. Having said that, so the economy is actually holding up quite well, I think probably 3% right now, GDP, but, like I said, supply is the issue. There's too much oil around right now. So there's no shortage, which is why prices stay capped. But at some point, either this is just one big sort of stimulus scheme to get QE or rate cuts, but the physical markets are not screaming that demand signal that the US economy is. And then you have to bring the economy down. You have a manufacturing economy and a services economy and the services side is doing quite well, as you see. But the manufacturing that's linked to other commodities is quite weak. So we have a two tier economy, so it's very hard to say there's a disconnect. But from the equity valuation of those companies versus the commodities, Yes, there's a disconnect, right. You can't compare the S&P against a commodity market because that's mostly tech stocks.

Conway Gittens: So given your outlook and from what you're hearing, the screaming that you're hearing from the commodity market, where should investors put their money to work in the commodity space.

Maleeha Bengali: So based on our view, we actually have a very sanguine view about what commodities will do because the Fed is going to cut rates. I think the housing market... US consumers are strapped when the Fed lowers rates by whether it's 50 or 100 basis points, the dollar is going to fall eventually and then commodities will get a bit of a boost. But not all commodities are going to go up. So, now where do you invest? We like copper because I think copper has the tightest demand-supply fundamentals where demand is weak from Chinese property bubble, but there's a lot of strength coming from the EV market power global data centers, the electrification that we talk about and supply is quite tight. So we like prices here. Because you get a bit of a snapback in demand in China and, boom, copper can rally really hard. So copper we like a lot. You just got to get on the right time. Oil we're not a big fan of forgetting the fact that we are talking about geopolitical headlines right now and assuming no infrastructure is taken out, there is no shortage of oil. And that's been my mantra for all of this year. In fact, I write in all my notes, so there's pockets of value. Then you have iron ore, you have steel, you have, aluminum. So we sort of break each market down by demand-supply factors. And only the ones that on a very conservative demand estimates have a tight market, like supply demand balance. Those are the ones you buy and not buy all. So going back to the consumer, going back to the investor, how do you know what to do. Because it's so confusing. But that's what our fund does, at least that's what we try to do.

Conway Gittens: And so what is the best way to go about investing in commodities. Are you a fan of the ETF route in the 60/40 model. What should our portfolios look like.

Maleeha Bengali: That's a great question. So markets love doing the 60/40 because bonds and equities, it's worked really well in the last few years, 10 years. So if we have inflation coming back with a vengeance, which it will at some point because the Fed's going to cut rates, you need to allocate a percentage, maybe 10% or 20% to commodities. Today, we are at a five year underweight of commodities, so nobody knows what to do. Nobody wants to look at it. But in the last two weeks, people are now sort of like saying, how do we invest? 

Going back to your investment vehicles, ETFs have been the only way to invest, but ETFs have a massive negative carry. This is what we've been saying. Like many years ago, we had this chart on one of our presentations: Nat gas is up 100%, but the ETF is down 20% because of the negative roll index. So this is why commodity markets are very complex because based on the cost of carry every month, you could be losing 1.5% every month even though the commodity is going up. So ETFs are not the best way of doing it. Unless you know what you're doing. You have to get the timing exactly right. And part of our fund does that right. We look at the physical markets. If we think the contango is in our favor, we'll go shorter or the backwardation. So we try to leverage that alpha for our investors. And play that. But if you just like a retail investor and just buy and hold, you won't always make money. So ETFs are probably not the best way to really make money in commodities, you have to trade the actual futures, the actual companies. We analyze the back end, the front end, the spreads, and based on the physical arbitrage, we'll take positions actively to get that benefit for our investors. Or the equities. And equities are very interesting because you can have an equity company like a gold mining stock that basically sees gold rally 30% but they don't make money because they have really high costs. So if you get the equity wrong, you would still lose out. So it's very, very complicated.

Conway Gittens: All right. Hold that point for a minute because that's one of my questions. I want to just backtrack just a little bit to this allocation. I think you said 10%.

Maleeha Bengali: 10% to 20% based on a view on the dollar, the federal interest rates, QE, at some point more fiscal spending, whether we get Harris or Trump, that's going to be supportive for commodities. So you need to start thinking about commodities if inflation comes back.

Conway Gittens: So how does that change, though, with age. If I am near retirement age or I'm a retiree, which a lot of our viewers are, is that 10% to 20% too much risk?

Maleeha Bengali: No, not at all. I'll tell you why. Because if you're aggressive, I would allocate 30% or 40%. If China comes back and we see massive value in commodities, I would go probably get out of bonds and go more into commodities. But if you're a conservative portfolio manager, think about your money you have in your pocket right now. Your dollar is getting devalued every single day based on inflation, based on more fiscal spend. So you as a retiree will have to put some money into the savings market or into commodities because commodities are the best inflation protected securities, because they go up with inflation. So if you want to allocate, don't go something risky like Nat gas or something like tin or what have you. Copper, oil and gas. These are like stable commodities to get involved in gold and silver. I always tell all my big pension clients, put your money in physical gold, physical, silver. You have to if you don't have it today, you're losing out because that's doing incredibly well. And through 10 years, gold always holds its value.

Conway Gittens: I'm laughing because here in America. We have this big chain called Costco. And they're selling gold bars. And so what do you think about consumers actually going to a retail outlet and buying gold bars?

Maleeha Bengali: Yeah, you know what? Physical gold is one of the best ways to invest in gold because the ETFs have another issue. You could be long the GLD, for instance, or another ETF that's not backed by physical gold. And there could be a situation like we saw back in 2008, you get a systemic crisis. These ETFs fall even though the gold price goes up. So imagine you're sitting there on an ETF and you're like, wait, I'm not making money. Physical always holds value. So retail investors can trade the ETFs, but make sure you have some physical stored in the Vault somewhere,

Conway Gittens: But it's hard to unload a gold bar.

Maleeha Bengali: Yeah, that's true. It's a very good point. But back in the day, people stored in the mattress or what have you. But that's why Costco's bars are selling out because there's a bit of a premium even on silver as well. So I can't say you put 100% of wealth in that. It's hard to do that, but get exposure to ETFs, but also keep some gold bars around.

Conway Gittens: So for you, actually going to Costco is not a laughing matter. It's a real.

Maleeha Bengali: Yeah, it's real. We own physical gold and in London we do as well. There's a bit of a premium on that, but that never loses value to what gold price is. The ETFs can disconnect because there is a trade between the financial and the swaps. And most people don't realize the risk. At the end of the day, they are taking a risk, if the counterparty gets defaulted, you could lose out. That's a very small chance, right. But there is an inherent risk to think about. So physical is always the best way to trade.

Conway Gittens: So what about the commodity trade through equities, like a Freeport McMoRan FCX or ExxonMobil XOM or even a Caterpillar CAT? Talk to me about what are the best places to go if you don't want to buy a commodity but you want the exposure through the company?

Maleeha Bengali: Absolutely. I'll give you an investment philosophy. So, we like a commodity called copper. There are so many ways to invest in it. You can either buy the actual copper, you can buy various parts of the curve structure or buy the equity. So, what we do is we track about 20 or 50 different companies and we model these companies and their commodities. But the equity is a bit more complicated because a company could be exposed to copper, but if they are inefficient with their cash resources or free cash flow, have higher operating costs, then they won't maximize or realize the copper price. So, we build these models. We spend time talking to management. So you need to have an equity model on top of the commodity model. Something like Freeport is a great company. We've always loved it. And I think their costs are very contained. They have really good maximization capture rates, so we love it, but there's always a lag. And this is what I've sort of built my career on is that, the equities and commodities, there is an arbitrage, but it's not 100%. An equity is a 20-year instrument. So we'll always create a discount value. A commodity is something that you have today or you don't. If you have it, you don't need it. If you don't have it, you'll pay whatever price to have it. So they trade on different price cycles and you have to capture that in a very, very specific way. So there is an arbitrage, but we take all the price realizations and see which equities capture the most bang for your buck, so to speak. So we love Freeport and Exxon is a company that we haven't liked very much because the capture rates are not as high as something like Antofagasta or Freeport, and gold mining companies are even worse. Even the gold's going up. These guys are not able to actually make enough earnings, right. I mean, you would think if gold is up 30% their earnings should be up more or less, but they're actually underperforming massively. So, our job is to realize, right, do I want to be long, the actual commodity to get the maximum sort of return for my investor or the equity. So this is a dynamic process. And we are constantly doing this daily or monthly and we're switching into one or the other to just get that extra couple percent. And that is what we do.

Conway Gittens: All right, let me go through some prices because I like to give our viewers some choices. So copper is up 11% year to date, up 18% from a year ago. Oil is up 3% year to date, but down 3% from a year ago. Gold is up 25% year to date and up 38% from a year ago. Out of those 3, which one do you like the best.

Maleeha Bengali: I like copper and gold. I'll tell you why. Gold has done really well the last year, but it did nothing for many, many years. And if I'm right about the economy and how much fiscal or monetary spending. We're going to get, inflation is going to come back. The only asset to be in will be commodities and probably gold in these things. So we're very bearish on the dollar long term. And we think there'll be a recession. We probably already in a recession right now. Most people don't realize. So, Yes, I know Goldman's numbers very well. And we have an election coming up right now. And there's so much debt. We're trading North of $36 trillion in US national debt. So if you imagine right now the economy, I gave an example to my clients, right, back in 2008 during the Lehman crisis, we did $150 billion of QE and the whole market was saved. In COVID, we were doing $150 billion a day. So imagine the economy is so much more leveraged today. When the next crisis happens, the Fed will need to print, what, 10 trillion, $20 trillion? These numbers are up in the air right now. So what happens in that scenario? Your Fiat currency gets devalued, commodities go up, gold goes up. So we love gold. And Yes, we are on the precipice of a recession. Maybe not in the next two months, maybe in the next, maybe in the next six months. We were getting there and this experiment, this debt experiment is going to go out at some point.

Conway Gittens: So you are bearish on the dollar.

Maleeha Bengali: …long term. Short term, we are bullish. I think the Fed won't cut rates as fast, but medium term bearish on the dollar.

Conway Gittens: You are leaning towards recession coming in the US. What does that mean then for Bitcoin. You haven't talked about Bitcoin

Maleeha Bengali: Excellent question. So Bitcoin for us is a mixture of an FX and a commodity. So, it's like digital gold. Now, it is a very risky asset. So if there's really a systemic crisis, as you saw in the last few… in August, we had Japan go down 20%... Bitcoin fell. So if it really was a safe haven currencym, it would actually go up. So Bitcoin is like a very risky brother of gold effectively. So if you believe in the Fiat currency debasement, the Fed printing money, more rate cuts, Bitcoin will do really well because there's a limited supply. But if you believe in a systemic crisis, I'm not sure how it will do versus gold or silver. So we like Bitcoin, we allocate a little capital to it. But you have to understand the risk reward metrics. You cannot allocate 40% of your fund in Bitcoin because your VAR will blow up. So we do like it, but we have diversification, but we still like some of the other ones better than Bitcoin. But we do like Bitcoin here.

Conway Gittens: So what are the other ones that you like.

Maleeha Bengali: Gold, silver, copper. Those are my favorite.

Conway Gittens: I thought you were talking about other cryptos.

Maleeha Bengali: There's Ethereum, there's Solana. But then again, you're getting very, very down the risk chain. So you want invest maybe 1% of your energy, not more, but be prepared to lose it because these things go up 40% in a week. So we don't do that for our clients because we have a conservative fund. We can't afford to lose money for our clients. But Bitcoin is a part of a new structure. Ether, Ethereum, is also quite good. Like I said, it's all about the allocation. So, if I for my commodity basket, I was to allocate Bitcoin, I'd probably say maybe 10% or 20% to be Bitcoin, whereas 80% would be copper or gold or oil if I think it's the right value. So the percentage is very important. I mean, there are people out there who invested their entire net worth in Bitcoin. We don't do that even though we like that trade, but it's too risky. We can't afford to lose that.

Conway Gittens: All right, great. Thank you so much for coming by. Gave us a lot of information for having me. It's lovely being here.