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Interview with Monty Guild: Modestly Bullish on Precious Metals, China, and More recently had the chance to speak with Monty Guild of Guild Investment Management after the firm's Global Macro Conference Call, which covered a wide range of various markets and recently had the chance to speak with Monty Guild of Guild Investment Management after the firm's Global Macro Conference Call, which covered a wide range of various markets and trends as it usually does. This is the second portion of the interview, which covers investment opportunities in the commodities, fixed income, and international markets. Be sure to also read part one of our interview with Monty Guild

EQ: Looking at the commodities market, they are a bit depressed across the board. Would you say you’re bullish on commodities right now?

Guild: I’m modestly bullish on non-grain commodities. I think I’ll get bullish on grains after the harvest because we’re going to have a big harvest this year, which will force the price of grains down. Farmers will be selling into a low price because the quantity will be massive. It’s going to be a very good year for production, but after that, you’re looking at the next year. So I will be buying grains after the crop is in for this year.

As far as base metals, I’m modestly bullish. So that would be copper, nickel, and zinc. I think global industrial demand for those will increase.

I’m also modestly bullish on oil, which is selling about $5 to $10 above where it would sell if there was peace all over the world. We’re not going to have peace all over the world, we haven’t had it for many years in the Middle East and it’s just getting worse. Peace in Libya is evaporating, and there are continued problems in other parts of the Middle East like Iran and Iraq. Saudi Arabia will not be able to increase their production radically without damaging their wells.

The U.S. production is increasing, but outside the U.S., demand is increasing faster than production. Overall, global oil demand is increasing faster than oil supply, including in the U.S., which is a prescription for higher prices over the longer term.

EQ: What about the precious metals?

Guild: We think gold and silver have been under a correction for two and a half years, and that correction is coming to an end. They’re been basing for several months now. Many technicians that we talk to tell us that sometime between now and September should see their lows for this part of the cycle. So the base will end and they should start to rise in that timeframe.

EQ: For fixed-income investors, there doesn’t seem to be too many options at the moment. It seems the only asset that could potentially be attractive right now are quality dividend stocks. What are your thoughts?

Guild: It’s just a tough environment. Rates have come down, and therefore, where can you get a good return that can grow? I would argue that’s going to be quality companies that produce a dividend and can grow their dividend, as opposed to a bond where you’re at risk of higher interest rate. Now, I could be wrong. Interest rates have fallen over the first half of this year after rising in the second half of last year, but I think fundamentally, we’re seeing a stronger economy and increased demand for money as the business environment worldwide improves. That would argue for interest rates not decreasing a lot from here.

EQ: Looking abroad, the overall sentiment toward China’s economy seems to lean more toward the bearish side. Do you think the market may be overly negative toward China’s prospects for sustainable growth?

Guild: Yes. We think China has both problems and opportunities. The problem is that their banking system is over levered. There has been a lot of corruption and theft, and a lot of loans have been made to state-sponsored entity or local regional governed-sponsored entity where local developers and local politicians use those loans to steal from the Chinese people. This is what China’s anti-corruption program is trying to stop.

On the other hand, since it’s a closed banking system, the calls that people have made ad nauseum year after year that the banking system is going to collapse isn’t happening because there’s no outside money to flee the banking system. It’s all controlled within the government of China. For that same reason, China is not going to be the world’s reserve currency any time soon. They need a banking system with an open currency that trades in the world markets, which they don’t have.

So we are modestly bullish in China, but only in the context that we understand, that the government has to squeeze the banking system every so often to stop excesses and to gradually bleed the existing excesses out of the system. So you’ll see three or four months of squeezing, followed by six or seven months of expansion, followed by three months of squeezing, followed by six months of expansion.

So whenever you get a period like now where you’re in one of the expansion periods, you can trade Chinese stocks and make money. As soon as the tightening starts to happen, you have to flee and get out of China altogether. So we see China as a trading vehicle as opposed to an investment vehicle at this stage. But their economic growth is good.

China has all been associated with industrial growth and export growth, and that’s still there for China. They’re still trying to export and grow their industrial base, but at a very slow rate. The growth in China is now coming from the consumer. You’ve had 10% consumption as part of GDP a few years, but today, 35% of GDP is consumption in China. As a result of that, you’re getting economic growth even though you’re not getting the housing or industrial growth that you had the last few years. The growth today is coming from the consumer—buying a new car, a new house, a new apartment, or spending money on education for their kids. So we believe China will grow at 7% because that’s what the government wants it to grow at, and it can grow at that rate if the consumer consumes more without borrowing and levering the economy when they were growing the housing industry. So we like China and think it will continue to grow, but there will be periodic squeezes in order to get the excesses out of the banking system.

EQ: For a long-term investment vehicle in the international market, India is an economy you like. When you say long term, what is that time horizon specifically?

Guild: Two or three years.

India is good because you have a new leader running the country that is anti-corruption and pro-growth, and who wants to get rid of the embedded socialism that the last 60 years has propped where the Congress party has controlled everything. Now you have a free market, pro-business party that controls the most important house of the Congress. Therefore, they can get some of their plans through. Also, they control the governorship in a number of states. So it’s not going to be hard to see which states gets to grow. All of the growth projects will be in the states where the pro-growth party has the governance. This may cause other states to change and vote in more pro-business people because they’ll see that opportunities exist for others.

There’s a terrible infrastructure problem in India with bad roads, bad ports, and aging railroad systems. They’re going to change it all and make it so that farmers can get their crops to market rapidly, and expand the roads by 6,500 kilometers. That’s going to make some big changes in India.

EQ: Lastly, among the headwinds that we’re facing, what are the things that have you most concerned?

Guild: The biggest headwind we face in the U.S. I think is government regulations that are being drawn up by bureaucrats without any legislation behind them. We’re in a regulated industry—the investment management industry—and everyday more regulations are being promulgated that we have to meet. If you’re a banker, your regulations have been tripled. This is expensive, and it’s also uncertain. You don’t know what new rules will be promulgated that will make your business have to change, which will force you to re-allocate your resources and change your structure of doing business as a result of these new rules. So we talk to our clients all the time, and many of them are in various industries such as real estate, banking, oil and gas, technology, and so on. With the exception of technology, they’re telling us that they’re suffering substantially with these kinds of regulatory hurdles.

The Fed model compares the return profile of stocks and US government bonds.