By Sumit Roy
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 Managing Editor Sumit Roy recently caught up with Gartman to discuss the latest outlook on financial markets and commodities, including gold and oil.
Hard Assets Investor: What do you think about the recent concerns in the U.S. regarding the Fed potentially winding down QE later this year, and the consequent spike in long-term interest rates?
Dennis Gartman: The economy absolutely can continue to grow with somewhat tighter monetary conditions. In fact, I think the economy can grow a lot better without the Fed's help. The Fed's help back in 2008 was to be lauded; it was fantastic. They did exactly the right thing. In 2009 and 2010, the first rounds of QE were probably still to be lauded. They probably did the right thing; however, they overstayed their welcome. They've created a bit of confusion. And confusion breeds contempt, as I like to say.
The Fed understands it has to get itself out of the box that it has put itself in. The way to do that is slowly, over time. I find it amusing that people are already responding as if the Fed has already begun to tighten. We have to remember, the Fed is going to continuously add reserves to the system until middle of 2014. It will just be that they are adding at a [slower] pace. It's not as if they have taken anything out of the system. I think the markets have overreacted.
HAI: Interbank lending rates in China have recently spiked to record highs, and there's a lot of talk about a credit squeeze in that country. Is the situation in China something to be worried about?
Gartman: The rise in what is now referred to as SHIBOR -- the Shanghai Interbank Offered Rate -- is a shot across the bow by the People's Bank of China and by the new administration in China to say to real estate developers, real estate speculators, even stock market speculators: "Hey, we're not always going to be here to bail you out." Historically, the People's Bank of China has always allowed interest rates to rise in the day or two before any major holiday. It's not unusual for this to occur.
What is unusual is that the bank didn't come in after the holiday to re-liquefy the system. I think this was a brilliant move on the Bank of China's part to tell the markets, "Look, we're not going to be here to backstop you. You probably have got yourself overextended. Better get your house in order." It got everybody's attention. And my guess is that those who are a bit overextended are going to do what they can to become underextended.
HAI: Given all these current fears in the market, gold hasn't been responding. It's completely lost its safe-haven status. And prices have plummeted all throughout the year. What's driving gold, and do you see more downside to come?
Gartman: One, I do see more downside to come. Two, I never thought gold was a safe haven. Safe havens are something where you could put your money and the price of that asset won't move more than 1% or 2%. And you may actually earn something on it.
Gold was never that way. And why it was ever seen as a safe haven is really quite beyond me. It's now proving -- even to those who thought it might have been a safe haven -- that it isn't, because the losses have been substantive thus far. And I fear the losses may become even more substantive in the days, weeks, and months ahead.
Gold, to me, was never a safe-haven asset. One should be hard-pressed to even call it an asset. Assets should earn you something, or assets should pay you a dividend. Gold doesn't. Gold was a fear phenomenon, not a safe-haven phenomenon. I think there's a difference.
HAI: Is technical analysis the best way to look at the gold market right now? You recently gave a few tips on technical analysis and you talked about "the box." Is that something you're using to forecast gold right now?
Gartman: Understanding the technicals of a market is terribly important. Understanding the fundamentals of a market is terribly important. When you can find a market that you understand technically and you understand fundamentally -- and both the technicals and the fundamentals are pointing in the same direction -- you're probably going to succeed.
As for "the box," it's something I've always looked at; it delineates the 50% to 62% retracement of the previous rally, or the 50% to 62% retracement of the previous big decline. If you think gold started on its upward climb from $275 an ounce 12 years ago, and got to close to $1,920 an ounce, 50% back merely takes you to about $1,100. A 62% correction could take you all the way to $900. That's a long ways away.
HAI: Oil has been doing a little bit better than other commodities this month. Prices briefly hit a multimonth high earlier in June, on the back of that conflict in Syria. What's your take on this market?
Gartman: The secret to the crude oil market is the term structure. It's in backwardation in WTI across its entire term. That tells you that demand is either strong or supplies are weak. And what I think is the case is that demand is really quite strong. Markets in backwardation are strong bull markets and weakness is to be bought.
HAI: Sticking with energy, natural gas had a strong start to the year, but has fallen significantly recently. Is it a weather play right now? Or do you see some longer-term trends that can impact prices?
Gartman: The only thing that will help natural gas is hot weather through the summertime. The problem with natural gas is that we are finding so much more, every single day through fracking processes -- even more than we are finding crude oil. The supply is just huge.
And it's going to get larger and larger over time. It's going to be very difficult for natural gas to get above $4/mmbtu. If it does, it will only be fleeting in nature, as it will quickly be hedged away. I'm rather openly bearish of the natural gas market at this point.
HAI: Will grain prices finally decline this year? A record harvest is expected by the USDA, but what are you seeing right now?
Gartman: It's hard to be bullish on corn, particularly given the size of the crop we're almost certainly going to have. Yes, the crop went in the ground very late. Yes, that can mean a reduction yield. And, yes, if an early frost were to occur, that may mean problems at the back end of the crop year. But if those don't occur given the fact that rain does make grain, given the fact that the crop finally did get into the ground in reasonable order, and given the very good growing conditions that have occurred in the past several weeks, you're going to have a huge corn crop. And we will not be able to use it.
The carryover next year is going to be egregiously high. I'm hard-pressed to think that that means anything other than lower prices. Moreover, the charts don't look bullish. The charts certainly look bearish.