By Sumit Roy
Investment guru gives his take on the developments in financial markets in general and commodity markets in particular.
Dennis Gartman is the man behind The Gartman Letter, a daily newsletter discussing global capital markets. For more than 20 years, The Gartman Letter has tackled the political, economic and social trends shaping the world's markets, and Gartman himself is a frequent guest on CNBC, Bloomberg and other financial media outlets. Hard Assets Investor’s Sumit Roy recently caught up with Gartman to discuss a wide range of topics, including gold, oil, natural gas, housing and China.
HardAssetsInvestor: Is the crisis in Cyprus significant for the global economy?
Dennis Gartman: It is significant for the psychology of investors. I think it’s significant for the psychology of wealthy families. I think it’s significant for people outside the United States to worry about the sanctity of contract and to worry about the sanctity of bank deposits. It adds a real concern to whether your money is indeed safe. Now it doesn’t mean that things are going to fall apart. It doesn’t mean that the world is coming to an end. But it does mean that you have an added concern that you have to add to the many other concerns that one has when making investment decisions.
At the margin, you have to suspect that wealthy families and wealthy corporations have had meetings to say “Look, the game changed a good deal … what do we have to do to protect ourselves?”
And as I like to say—since all economics is the study of people’s propensity to do something—what is the propensity for an investor from outside of Europe to put money into Europe? I have to suspect that that has been somewhat reduced. What is the propensity of somebody from inside Europe to move money outside of Europe? I have to think that that propensity has been somewhat increased.
In the long run, the Cyprus situation is bearish of the euro. I think in the long run, it’s bullish of dollars—U.S., Canadian, Australian and Kiwi dollars. On other hand, I’m not quite convinced that it is either bullish or bearish of the stock markets.
HAI: Back in May, before the announced QE3, you made the call that gold had put in its short-term low below $1600. Of course, that proved to be very accurate, as gold rallied all the way up to $1800. Now we find gold back near $1600 again. What do you think is going to happen this time?
Gartman: I’m very bullish on gold, but not in dollar terms. I could care less, to be honest, about gold in dollar terms. I have immense interest in gold in yen. And it’s hard for people to believe that gold denominated in yen is at a new all-time high. Nobody recognizes that fact. But gold in yen terms is at a new high.
Gartman (cont'd.): I’m very bullish on gold in sterling. It’s almost at a new high. I’m starting to turn bullish on gold in euro terms. If you’re a chartist, the chart of gold in euros looks demonstrably better than does the chart of gold in dollar terms. So I really don’t care a much about gold in dollars.
As I said, I’m very bullish on gold in yen, especially given what Mr. Abe, the new prime minister, wants to do, and what Mr. Kuroda, the new head of the Bank of Japan, intends to do. I’m quite bullish on gold in sterling terms because of the political problems that seem to be bubbling forth. I’m very bullish on gold in euro terms because of the Cyprus situation. But I am totally, completely, utterly ambivalent on gold in dollar terms.
HAI: What do you think is going to happen to gold in any currency once the Fed ends QE, or once it starts raising interest rates, which inevitably it will do at some point?
Gartman: Rising interest rates has tended on balance—and the operative phrase here is “has tended,” since it’s not always the case—to be deleterious to gold in that particular currency’s terms. So if the Fed begins to suspend QE3 or QE5 or QE10, or whatever QE we’re at right now, that would tend to be detrimental to the gold value in dollar terms.
That’s not going to happen for awhile though. The Fed has told us they have no intention of ending QE until unemployment drops below 6.5 percent and/or until inflation is about 2 percent; neither of which appear to be anywhere near the horizon.
HAI: As you’ve spoken about many times, oil production in the U.S. is booming. How long will the boom continue? And does it mean oil prices have topped out?
Gartman: Write this down. The boom will continue until it stops.
HAI: That’s a good way of putting it.
Gartman: In the old days, we only had success rates up until about 10 years ago of maybe 50 percent. Now with better technology, we understand the rock formations underground so much better than we did in the past. Now, drilling, their success rates are 90 and 95 percent.
And when you send that soda straw down to go drill for the crude oil and you find it, we also know that it’s not just a finite shape down there, but it’s usually a shape like your fingers on a hand that extend for miles in other directions. When we get to the oil, we know we can bend that pipe and go off radially in 10, 15 different directions. So it’s so much cheaper to do than it ever was before. And we’re finding so much more crude oil from the same reservoirs than ever before.
When is this boom going to end: 20 years from now, 25 years from now, 30? I think we’re going to be surprised at how much crude oil we are able to find, and how soon—not just the United States and Canada combined will be energy independent—but how soon the United States alone will be energy independent.
HAI: Sticking with the energy theme, natural gas seems to have made a huge comeback, with prices trading around $4/mmbtu. Is this solely related to the weather, or is there something more significant going on here?
Gartman: The rally from $3 to $4 has been predicated upon weather, but it’s also predicated upon a massive amount of short-covering. There are a lot of hedges that had been placed that suddenly are now underwater and uncomfortable. There shouldn’t be, but the banks are probably making it uncomfortable for the drillers who had hedged, and you’re getting a lot of short-covering going on because of that. But it started with weather.
As we know, because of global warming, it’s really cold outside. I never understood the nonsense of global warming theory anyway. But it’s very cold out there now, and demand for natural gas is historically unprecedented. Here we are in late March—I’m in southern Virginia—and it snowed here yesterday. It’s unbelievable.
And I love the global warming people: They blame snow upon global warming, not that it just got cold out. But this cold weather has led to a big increase in demand for natural gas later in the season than anybody would have imagined.
You have weather that sent it up and short-covering that’s kept it going. I doubt that you’re going to be able to get it much above $4.50, because at $4.50, it’s enormously profitable for drillers. And they will be expanding production and hedging again at $4.50. There are a lot of people out there who would like to start drilling again.
HAI: Speaking of weather, if we get weather that normalizes this year, in contrast to last year’s record-setting drought, do you think corn and the other grain prices are going to fall significantly?
Gartman: Corn is interesting. We’re going to get this next crop in the ground and then harvest it. And it’s going to be a big crop since the odds are, after five years of drought, that you’re probably going to have a decent year of growing. Already Illinois is no longer droughted. And that’s Illinois, the biggest corn- and bean-producing state in the union.
And those better moisture conditions are actually moving towards Iowa. There are still some problems in Kansas. There are still problems in Oklahoma. There are still problems in Texas. But it appears that the year is going to get off to a good start. My bet is we have a huge crop of corn.
On the other hand, we’re going to run right smack dab out of corn before the new crop gets to us. And it appears the crop in Argentina is smaller than people had hoped due to a late-season frost down there. There were hopes that there would be enough Argentine corn coming in to get us through what is known as the transition from old crop to new crop here in North America.
Thus, you could have old crop corn continue to go up, but new crop corn is a different story. A price of $5.50 new-crop corn, under any circumstance, is an expensive corn. And if you get decent conditions, the fear is you can get corn back to under $4 without too much difficulty—that would be in the new crop, not in the old.
HAI: Clearly there are signs of strength in the U.S. economy given all this positive data we’ve been seeing. But growth in China remains relatively sluggish compared with the double-digit growth we were accustomed to. Is the China story over? And what are the implications for commodity demand?
Gartman: What you have to understand about China is you have something like 2 billion people. Incidentally, there will be fewer Chinese 50 years from now than there are now. China has made some very stupid decisions as far as demography is concerned. The single-child program that was in effect until just recently was ludicrous, nonsense. It was comically bad. It was stupid beyond belief.
But in any case, you have that many billion people—as I like to say—leaping from what had been the 17th century directly into (they’re bypassing the 21st) the 22nd century. And they’re not going back.
The Internet has brought modernity to the villages of China. Fifteen years ago, if you lived 500 miles to the west of Beijing, you had no idea what the world outside looked like. You really didn’t. You didn’t have telephones; all you had was a newspaper that came in once a week.
Now you’ve got the Internet. And believe me, the Chinese people have seen what life looks like in Taiwan, and it looks better in Taiwan than it looks in the villages to the west of Beijing. And they see what life looks like in the United States and in Canada. They’ve seen what life looks like in Europe. And they are collectively saying, “Get that for me, and get that for my children, or get out.”
And Li and Xi, the new prime minster and president, understand that. The Chinese leaders for the past 10 years have said that their intention is to make China a consumer-oriented society. They’re going to. They will do this. And per-capita incomes are rising. China’s going to eventually cease to be the world’s maker of things. And China will become the world’s taker of things.
The Chinese people want better drapes and brass plumbing fixtures and better television sets, better health care, more roads and more cars. And they’re just beginning to understand that.
I’m amused when people say the Chinese economy is slowing down. Yes, it’s slowed down from 15 percent growth to 8 percent growth. Gee, that’s still four times our growth; I’ll take it. So, no, the China story is not over.