by Monty Guild & Tony Danaher
Guild Investment Management, Inc.
June 17, 2010
As some of our regular readers have noted, we have not recommended base metals for months. We have recently received some emails about base metals and our position on them. We remain bullish on gold and oil, but we are not currently bullish on base metals. We think the current rally in base metals prices is a good time to sell.
Why do we take this stance? We are fundamentally driven analysts and we believe that a deflationary depression or a damaging inflation are both equally probable within the next two to seven years, especially in the over-levered developed world.
Sometime within about a five year period, we expect a breakdown in the European banking system and in the Euro, and we do not know if government policies to deal with the breakdown will be effective in creating an inflation or if they will result in a deflationary depression.
Clearly, a deflationary depression would be very negative for base metals’ demand and pricing. Gold demand will be high in either case, and oil is hard to substitute for, as it is widely used in the fast growing developing world and would continue to be used to some degree in the developed world even in the eventuality of a depression. In our opinion, a likely outcome is a depression in Europe (therefore decreasing need for base metals) and continued growth in the developing world. If the developing world will still grow, will they not still consume base metals? The answer is yes, they will consume base metals, but the decrease in demand from the developed world combined with high stockpiles of base metals in the developing world could easily cause prices to fall.
In summary, while we believe that oil and gold will rise over the long-term we are not confident that base metals prices will do the same. Thus, we would use the current rally to sell base metals.
© 2010 Monty Guild & Tony Danaher