Dennis Gartman's State of Commodities: Gold to Replace Euro

Includes: CORN, FXE, GLD, JYN, OIL
by: Hard Assets Investor

Dennis Gartman is the man behind The Gartman Letter, a daily newsletter discussing global capital markets. For over 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.

Recently, we sat down with Gartman to discuss his recent call to go long-gold in nondollar terms, the changing role of OPEC and whether anything’s more important than agriculture.

Hard Assets Investor (HAI): Let’s get right to the meat of it. You recently said that you were bullish on gold, but not in dollar terms; rather, euros, pounds, yen, etc. How would you actually put that trade on, since gold is generally traded in dollars?

Dennis Gartman (Gartman): Well, it's not as difficult as it sounds. If you buy gold, by definition you have gone short of the U.S. dollar. If you buy a gold future or if you buy a gold ETF, that's essentially the trade you made. You've bought gold, you've gone short the dollar.

Let's say one did $100,000 worth of the gold ETF, GLD; how do you turn that into gold in euro terms? Well, you short the euro ETF, which should be easily shortable, but sometimes it's hard to borrow. If you bought $100,000 worth of the gold ETF, you would sell $100,000 worth of the euro ETF. And essentially what you have done is construct gold in euro terms.

If you bought $75,000 worth of the gold ETF and sold $25,000 worth of the yen ETF, sold $25,000 worth of the euro ETF, sold $25,000 worth of sterling, then you've effectively created gold in all of those other currencies. You've created a gold position not in U.S. dollars.

It's a much better trade. Gold has become a currency and it's become the reservable asset, in competition primarily with the euro, which is now the second-most-liquid reservable asset. And given the problems that are extant in Europe at this time with Greece and Portugal, Spain, Italy, etc., I just think it's the better trade. The more consistent trade and the less volatile trade is to be long-gold in non-U.S. dollar terms.

So you can do it most easily in the ETFs or you can do it very readily in the futures markets, which most people don't like to trade in.

HAI: What's the thesis for not wanting to be short the dollar? What's wrong with being short the dollar right now?

Gartman: Well, I think it's a bad trade. I think that the euro is now topped out dramatically. I think the problems in Europe are so severe that we're going to wake up one day and find that the euro is no longer traded; whether that's next week or next month or next year, I don't know. But the problems in Europe are much worse than all the problems here in the United States, fiscally. Except for Germany.

HAI: So it's not so much a dollar play as it is an anti-euro play.

Gartman: It's gold, in euro terms, predicated upon problems in Europe. So in some instances, some days you see gold is unchanged and the euro starts to go down. That's what happened yesterday. Long-gold in euro terms yesterday was really a short euro trade.

Today, long-gold in euro terms is, you're going to be losing a tenth of a percent as we speak, right now, on the trade. But if you were long gold in dollar terms, you'd be down a full percent.

HAI: So this speaks to sort of gold reiterating its historical role as money. Do you see this spilling over into other precious metals at all? Silver's basically been dead in the water since the consolidation. Do you think that that bull market is over in silver?

Gartman: I let people who are wiser, or younger, or stupider than I am trade silver. The random noise, the volatility, the scattershot trading that occurs in silver — it’s not a place that I find myself even modestly comfortable. So I hide to the sidelines and let somebody else trade it.

HAI: That's fair enough. But you have recently come out talking about being bullish on oil. Presumably that's something you're a little more willing to wade into.

Gartman: Yes, I think that the oil market has changed. Not today. I mean, they're just killing oil today. But I think what the Saudis have done was a brilliant move on their part, just a truly brilliant move. They said that they've split with OPEC — that the other OPEC members, basically the non-Gulf members, didn't wish to increase production. They said that they did and they would.

Interestingly enough, they've increased production in something that nobody wants. They're increasing production at a very heavy, high sulfur crude, which nobody really wants. And so, the Saudis, I think, have pulled the wool over a lot of people's eyes, especially the American public. It looks like they have done the right thing. It looks like they stood by us when in essence they really haven't. Nobody wants to buy Saudi heavy. No refiner anywhere will step up to buy it.

HAI: Do you think the rumors of OPEC's imminent demise have been overstated? A lot of the reporting about OPEC recently, even here on our own site, pointed out that the recent OPEC meeting was essentially saying this wasn't a decision by OPEC, it was a failure of OPEC to do its job and come to any consensus.

Gartman: It's very hard for Shia and Sunni Muslims to come to any agreement on anything. And what you saw here was a rift between Iran and Saudi Arabia. And the Saudis, I think, in back channels, have said, "We've got a problem here. We need to make sure that we placate the United States and appear to be friendly with the United States. At the same time, we would prefer keeping oil prices reasonably firm. How do we accomplish that? Well, let us make a statement that we're here to increase production, and let's increase production in something that nobody wants."

They get the best of both worlds.

HAI: So OPEC isn’t in collapse?

Gartman: T. Boone Pickens was on CNBC saying what he thinks he saw at this meeting was the beginning of the end of OPEC. I heard the same story about the beginning of the end of OPEC in 1980. We heard it in '85. We heard it in '90. It's 2011. OPEC's still here.

HAI: But do you think that they remain as relevant? Most new sources of oil aren’t inside OPEC: The Campos Basin in Brazil, for instance, or sort of alternative sources of oil like the shale and tar sands. Does OPEC continue to matter as much as it has historically? Or will it sort of be in a continual decline?

Gartman: OPEC is obviously less valid than it was previously. But I don't think it is invalid. I think their power is obviously somewhat limited compared to what it was. But do they still have an effect upon the global world market? Of course they do. Do I think they're going away any time soon? No, I really don't. I think Europe will go away faster than will OPEC.

HAI: One more thing before I let you go. Last year you famously said, quite self-deprecatingly, that corn was kind of your worst call of the year. You went long right before a surprise nobody saw coming in the corn inventory reports. Now we're looking at corn that's near record highs. Is it too late for investors to be paying attention to agriculture?

Gartman: No, it's not too late for anybody to be paying attention to agriculture but it might be too late to be long corn. But it's not too late to be paying attention to agriculture. I mean, agriculture, what's more important than food? I'm going with nothing is more important than food. So people need to pay attention to agriculture.

But here you have corn now trading at 50 cents over wheat. That's inexplicable. And as Lord Keynes said, the market can remain irrational far longer than you or I can remain solvent. Corn prices 50 cents per bushel over wheat is irrationality. And it won't last for very long. But it's the harsh fundamentals of the moment.

We've not been able to get the corn crop adequately in the ground, and that's going to be a real problem for corn this year. The problem for corn next year will be that livestock producers are absolutely dumping livestock on the market because nobody can feed hogs, chickens and cattle at $7.50 for corn. You just can't do it.

So they've been dumping underweight hogs, underweight cattle, just so they don't have to feed them high-priced corn. That's putting downward pressure upon livestock prices. But what it also means is you're removing all of next year's livestock from the market. Next year we're going to be so short of livestock it's going to be frightening.

HAI: Right, and presumably that gives you a negative-demand effect for corn — you'd expect it to come down.

Gartman: That is correct. The feed usage of corn, I think, will be demonstrably smaller next year and into 2013 than it is this year.

HAI: You talk about the prices sort of being irrational. You commented, I think once in your letter on gold, you talked about there being sort of too many people involved in gold. Do you feel like the commodities markets overall have kind of changed with the retailization of futures through ETFs?

Gartman: Well, I think that there's probably too many participants because of long-only funds, who don't trade commodities the way commodity pros normally do. Commodity pros are willing to be short as well as willing to be long, whereas the long ETFs are by definition long; they don't ever get short. And so they end up piling in, and then all of a sudden the door slams and their models all turn and they dump prices for weeks on end.

So that's a problem. And I think it tends to move prices egregiously too high. And at the same time it then moves them egregiously too low. So perhaps there's some concern there. But nothing really changes. We're human beings; we don't change.

HAI: Fair enough. Dennis, this has been really insightful. Thanks very much for taking the time.