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Dennis Gartman Interview: On Gold, Inflation and Where Next for Oil

"Gold is always liquid..."

FOR OVER two decades, Dennis Gartman has tackled the political, economic and social trends shaping the world's market in his publication The Gartman Letter.

Gartman is a frequent guest on CNBC, Bloomberg and other financial media outlets. Hard Assets Investor spoke with Gartman from his Virgina offices last month about gold's recent moves, emerging markets and the closing the Brent-WTI price spread.

Hard Assets Investor: What's your take on what gold is doing right now?

Dennis Gartman: A lot of people have been taken out of their positions. You can see the change in the makeup of open interest. Speculators have reduced their positions by more than 100,000, 125,000 contracts. Their long positions have been reduced to minimal levels. On the other hand, institutions that tend to be naturally short have reduced their positions by the same amount. So the stronger hands are less short; the weaker hands are demonstrably less long. And I think you've seen a low.

HAI: Gold also doesn't seem to have its inflation hedge?

Dennis Gartman: Well, first of all, there's not much inflation to be concerned about, at least if you believe the government's statistics, and the market has to take the government's statistics as face value. So if you're looking at gold as a hedge against inflation, there isn't any inflation.

And it is bothersome also that if you look at the monetary aggregates — and the one aggregate that I look at is the St. Louis Fed's adjusted-monetary base. It has been falling since last June, and falling rather sharply. Those who think that inflation is going to be created by rising monetary aggregates are simply wrong. That's not a problem to be concerned about for the reasonable foreseeable future. And to be quite honest, the foreseeable future is probably — let's see, this is Monday the 21st — the foreseeable future is Monday, the 28th.

HAI: What is the biggest influence on gold right now?

Dennis Gartman: I think it's uncertainty and marginal liquidation. I think it's weakness in stocks that has forced the selling of something and I think stocks are inordinately cheap. I don't think they're going to get much cheaper. As stocks have fallen, sometimes investors are being forced to sell things they would not like to sell. And you almost always can sell gold. It's always liquid.

HAI: What is your take on the Treasury market right now?

Dennis Gartman: Everybody thinks it's ready to drop, and it continues to go up. It continues to make newer highs. Rates continue to make newer lows. And anybody who is short has had uncommon discomfort over the course of the past three years, two years, one year, one month. You can write this down: The bond market will break when it breaks. And it won't break an instant before then. And if you miss the top by a month and a half, if you miss the top by two months, if you miss the top in the bond market by six months, you'll be fine.

HAI: What do you see as a safe-haven investment right now?

Dennis Gartman: I'm amused that people call gold a safe haven. It's not a safe haven.

HAI: Why do you say that, because of the volatility?

Dennis Gartman: It's because of the volatility, absolutely. Safe should be nonvolatile. There are very few things that are nonvolatile right now. The only thing that seems to be nonvolatile is Treasury securities of less than one-year duration.

HAI: Let's talk a little bit about emerging markets. Is there a country in there that you like in particular, or is China really going to dictate what happens in that regard?

Dennis Gartman: China tends to dictate what happens everywhere these days. And I'm OK with that. You know, it's 3 billion people, or however many billions of people it is. As a friend of mine once said, "We must remember out of the last 30 centuries, China was the largest economy in the world for 27 of them." It's just a return to the mean. When you have that many people, you're going to be the dominant economic force.

Do I know what Chinese GDP growth is? No. I think it's somewhere between 5 and 15 percent. And anybody who thinks they can forecast anymore tightly than that is either a charlatan or naïve — one of the two, and I'm not certain which.

Do I think that China is going to have a recession where GDP growth goes negative in the next 10 years? No, I do not think so, given the fact that you have hundreds upon hundreds of millions of people on the move from the western provinces to the eastern provinces where they are certain that economic growth is going to be permanent. And it will be permanent in my lifetime, and probably permanent in my daughter's lifetime.

But we have to understand that a slowdown in China means something closer to 7 percent GDP growth. Is that possible? Of course it is. But is China going to go negative? I doubt that. But I have been wrong in the past, and I can be wrong again in the future.

Brazil is probably the better of all of them because it's probably got the best policies and the most reasonable respect for law. It probably has a population willingly coming into the 21st century. It has plenty of raw materials that it can export and it has industry. And it also has a growing population, which is important. I don't think you can underestimate the importance of rising population growth. It's hard to have a growing economy if your population is declining.

HAI: What advice would you give investors who are looking for exposure in emerging markets? Is it an ETF broad basket?

Dennis Gartman: I think ETFs are far and away the better way to go. Very few of us have the capability of understanding corporate structure or corporations here in the United States, much less individual corporations abroad. Reasonably widely ranging specific country ETFs are probably the way to go.

HAI:What do you think the Eurozone is going to look like by the end of the year?

Dennis Gartman: You are going to have to have pieces fall off. I think it's only rational and reasonable to expect them to fall off. I think Greece has to go. The question is whether Greece goes on its own accord, which is difficult for Greece because then it will be forced to accept legal responses. It will be easier for Greece if the Germans say, "You're out." Because if the Germans say, "You're out," then the Germans will have said, "OK, we know that we're pushing them out and we're not going to get repaid on any of this debt."

HAI: Sort of like a foreclosure?

Dennis Gartman: Yes. It would be rather like a foreclosure. 

HAI: And when that happens, will it be for the other countries to look at and say, "Is that where we want to go?"

Dennis Gartman: Put yourself in the position of the Portuguese prime minster. Say the Greeks are removed, or are forced out of the European Union, and are allowed to take back the Drachma. History shows that countries that are forced to devalue within a year are in much better condition. I can't think of a single incidence where a country that is forced to devalue is in worse shape one year later than they were before. It depends on which industries they have.

But right now what's your propensity to step up and go to Greece for a holiday? What's your propensity when the price has been cut in half? Great. Greece has a very large textiles business. If you're a textile buyer, what's your propensity right now to buy Greek textiles? Probably nonexistent. What happens six months from now if it's cut in half? It's probably been greatly enhanced.

So if you're the Portuguese prime minister and you see Greece forced out of the European Union, walking away from its debt, and seeing that its unemployment rate begins to decline, and that its trade begins to pick up, you as the Portuguese prime minister are going to be forced to say, "I want the same thing."

HAI: We're clearly seeing oil in a downward trend. Is this just the possibility of the Iran problem going away? Or is it just the production is so strong and the demand is not keeping up with it?

Dennis Gartman: Yes and yes. I think it's a lessening of the Iranian problems. I think it's a clear understanding of how imperative, how huge are the findings of new energy in the US, in particular of natural gas. It's abundantly clear. Look at the numbers. Americans are driving 8 percent less now than they were a year and a half ago? Everybody's doing that.

And think about this. The average age of the American automobile is something like 10.75 years old. Every car that is now retired is probably an automobile that gets 12 miles to the gallon and will be retired and replaced by a car that gets 30 miles to the gallon. Every single day we are retiring old clunkers and putting high-tech automobiles on the road that are more gas efficient.

So even if we begin to increase the amount of mileage that we drive — and I don't think we will — we may be increasing the mileage driven with cars that are more mileage efficient.

HAI: Are we going to see a closing of the Brent-WTI price spread within a year? Or is that still pretty far off?

Dennis Gartman: No, it's already in the process of doing it. You have to remember, Brent was $26 premium to WTI about six months ago; now it's $15. It's going to go back to discount, which is where it should be.

HAI: And if somebody wanted to play that, is that a simple long WTI/short Brent in some capacity?

Dennis Gartman: That's the way to do it. But the market is already anticipating that. And if you go out into the forward-term structures, presently spot rate has Brent at about a $15.80 premium to WTI. But you go six months forward and it's already down to $12.

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