Interviewer: Geoff Candy , Posted: Wednesday , 06 Jun 2012
GEOFF CANDY: Welcome to this week's edition of Mineweb.com's Gold Weekly podcast. Joining me on the line is investor extraordinaire and author of the Gartman Letter, Dennis Gartman. You've been on record recently saying that perhaps gold is not the safe haven that a lot of people have thought that it was and there is a lot going on in the global economy at the moment. Let's perhaps look at some of the factors driving what's going on in commodity markets. Clearly the first big issue at the moment or at least the most pressing issue and the top of mind issue for a lot of people, is what's going on in Europe. And clearly that does have an impact on not only the global economy but also on commodities themselves, how do you see things playing out there?
DENNIS GARTMAN: OK, first of all let's talk about the notion of gold not being a safe harbour. I have gone on record as saying that gold is not a safe harbour, and by that I mean safe harbours are stable. Safe harbours are where the money that you put into it is precisely within a percent or two, the money that you get out of it. Safe harbours are safe. Gold is anything but safe. Safe harbours don't do what gold did last Friday when gold rallied 2.5%. That is clearly a speculative harbour. That doesn't diminish the investment value of gold, but I object to the term safe harbour, and I guess that never came across effectively enough. Gold in the vernacular "ain't safe". Gold is a speculation - it is probably a better speculation than is the ownership of equities in a recessionary period of time. It is a better speculation - probably a better investment than is the ownership of commodities or other commodities in a recessionary period of time. But let's disavow ourselves of the notion that it is safe. Gold is not safe - gold is speculation.
GEOFF CANDY: Before you go on though, in terms of that notion of safe harbour then, especially given what we're seeing and a lot of the concerns around things like FIAT currencies - are there any safe harbours?
DENNIS GARTMAN: Yes under your mattress, that's the safest harbour. That's the only safe harbour that I can imagine these days, to be honest. If you had asked me that same question two years ago, I would have said well perhaps Australian, New Zealand, Canadian and US debt securities may have been a relatively safe harbour. But even they have become egregiously speculative, moving violently in unusual manners. So I'm not sure that the debt market any longer is a safe harbour. I honestly, and I mean this, and this is very strange for me to say this sort of thing, but I think the only safe harbour is under your mattress. That's a safe harbour - you know when you put €1m or $1m under your mattress, barring theft, it will be there. The value may have changed but at least the corpus of what you have will have been the same. There will be no change, it will be safe and so that's important. What's going on in the commodities markets? Well I think that some important circumstances prevail - and let me make sure that everybody understands... I think I've said this before on your programme, and I'll say it again, I am not a gold buck. I don't believe that gold is the B-all and end-all - I don't believe the world is coming to an end. I don't believe that all FIAT currencies are going down the drain in one effective flush, I don't believe that. What I do think, however, is that gold as I like to aver, is moving from the lower left to the upper right on the charts and is doing so with some sense of consistency over the course of the last six years and that, given the present environment in Europe which is clearly confused and likely to become even more so with the clear recessionary, and perhaps in some terms depressionary circumstances that prevail in Europe, and I do think that 15% to 20% unemployment is depressionary levels - there's no choice but for the ECB to err eventually. The Germans won't like it but the ECB is going to have to step in and monetise sovereign debt of all the nations in Europe - it's going to have to happen - whether it happens this week, next month, later this year, it's going to happen. The Federal Reserve Bank is going to continue to err upon the side of easier monetary policy - they have no choice. QE3 after the non-farm payrolls number is back upon the table. The Bank of Canada is going to err upon the side of easier monetary policies. Last night the Reserve Bank of Australia cut its base lending rate 25 basis points, not 50, but 25 - they're erring that way. The central banks are all going to err - they have no choice but to continue to err upon the side of ease. That's probably going to inure to the benefit of the gold market. It almost has to so I think that the trend for gold is still from the lower left to the upper right. I think that you want to own gold in dollar terms, I think you want to own gold in euro terms, I think you need to own gold in yen terms and quite honestly at this point given the economic circumstances, I think you'd like to be long of gold and short the stock market. I think those are all consistent with a consistent philosophy, a consistent economic outlook, at least for the next several months...
GEOFF CANDY: In terms of the rest of the commodities complex and thinking more along the lines now of base metals and the like, I would assume that that would have some reflection on the fundamentals that we've just spoken about and the unlikelihood of a significant jump in growth within the western world at least.
DENNIS GARTMAN: I think the probabilities of growth in the western world are relatively minimal. For the next six months to a year I think the odds of growth of the kind that we needed in China, of double digit rates is probably also diminished for the next six months to a year or more before the expansionary policies and the monetary authorities can really begin to take hold and under that environment, in that regime, most commodity prices are probably not going to do that well. For example I think if you want to take the precious metals relative to the base metals, golds propensity to rise relative to copper, is probably quite large and I think gold will gain upon copper. If you were long $X of gold short $X of copper over the course of the next six months to a year, you're going to do quite well. I think that's the way to look at it. If you want to be long of the precious metals, gold and silver, short of the base metals copper, tin and zinc you're going to do well. I think that that makes sense given the current environment.
GEOFF CANDY: How do you see things playing out in the eurozone, do you see a break up as even remotely possible?
DENNIS GARTMAN: Yes I think its imminently possible - it's a matter of whether Germany throws Greece out and once Greece goes, so goes Spain and so will go Portugal. To be quite honest, if Greece got its drachma back, devalued by 50% it would be horrific for the Greek people for a period of time. But how much worse can it get than it is now and if they were to devalue the drachma, within a year history always shows that countries that devalue violently, end up doing quite well a year or two years into the future and they see economic circumstances picking up quickly - that is what history shows in every single circumstance with the exception of Zimbabwe. And I think that you should bet with history. So if Greece gets tossed out and I think that's possibly what will happen rather than Germany exiting it on its own, it forces Greece out after six months to a year, as the Greek economic circumstances get better through the devaluation, you're going to see the Portuguese and the Spanish administrations saying ‘we want to do the same thing' and they'll want out. The domino effect will take effect, no question. So I've never been a believer in the efficacy of the European monetary union experiment to begin with, and the experiment is now running amok.
GEOFF CANDY: Two questions quickly to close off with. Firstly with regard to the US and in particular the US elections. How do you see things there in terms of things like the debt ceiling and indeed what's likely to happen with the political environment?
DENNIS GARTMAN: Oh the debt ceiling will have to be expanded, there's no question. It won't be done until after the election, but mark my words, once the election is done and there's a lame duck Congress that meets for another six weeks after that election, they'll raise the debt ceiling, they'll have no choice. They will also reinstate all of the tax cuts. They will have no choice, but they'll do it as lame ducks, not the legislatures in effect before the elections. It just happens that way, that's the way it will play out. What I think that this means - if you had asked me six weeks ago, before the real tumult in Europe and its knock-on effect upon the economy here in the United States and having seen last week's non-farm payrolls number which were dismal by anybody's stretch of the imagination, if you'd asked me six weeks ago, was Obama going to be re-elected, I would have said yes. Now I have to say I'm not sure. I think it's now a coin toss and if we have two more months of bad non-farm payrolls numbers, he's out - which in my opinion would be a very good thing. But between now and the election, there's a great good deal of confusion and as I say in almost every speech that I give, economics is very simple. All economics is a study of people's propensity to take action. That's all economics is and between now and the election, what is the propensity on the part of businessmen and women, to expand production of anything I think relatively minimal. There's so much confusion that reins, the propensity to act is very large, the propensity to - as we say in the south - to hunker down is even larger and will just muddle through with very tepid growth, or we may actually even tip to modestly negative growth. It will not be substantive but there will be no growth between now and November until there's clarity in the political environment.
GEOFF CANDY: Finally then, in terms of gold going back to it, there's been a lot of talk recently about its use as a tier one asset within the banking system. How do you see that working, do you think that is likely to happen and if so will it have any major longer term effect?
DENNIS GARTMAN: I doubt that it's likely to happen. If it were to happen, on the announcement gold would be up $600 an ounce - it would be astronomic. Do I think that it's likely to happen...? I just throw that number out - let me revise that and say on that announcement, if there were such an announcement ever to happen, and I'm not sure that there shall be, gold will be up violently let's make that statement. Do I think that that's likely to happen? Probably not. Is it being debated? I suspect back in... I think the sherpers as I like to refer to them have probably had those discussions, and after the third Martini when people start to tell the truth, they probably have brought those discussions up, but do I think that that's likely in the next year or two or three, probably not...