Gold quietly becoming a reservable asset - Gartman

In this Newsmaker podcast Dennis Gartman tells Mineweb, why the trade in euro-denominated gold looks broken, where he is placing his odds and, why Chinese officials worry him

GEOFF CANDY:  Welcome to this Mineweb.com newsmaker podcast.  Joining me on the line is Independent Investor and author of the Gartman letter, Dennis Gartman.  Dennis in your letter on Friday you said you were considering re-assessing your position of buying euro-denominated gold, saying that gold in US dollar terms may still be and probably is in a bull trend, but gold in euro terms may now be a broken trade and if we could start with why you think that is?

DENNIS GARTMAN:  First of all let's always understand that - I will steal from both schools of thinking fundamentally and technically - but in 35 years of doing this I have watched so many times that the technicals break down first and the fundamentals tell you this is what we were doing and you find out later what was happening.  So looking at just the chart of gold denominated in euro terms, a lot of damage has been done.  Let's be blunt about that, it's really quite that simple.  We have taken gold in euro terms to approximately €1050 and then the next thing you know you are trading back under €950 and the next thing you know you are trading down to €910 and you are breaking trend lines along the way.  That's disconcerting, so that alone was sufficient for me to say, I've been involved in this for a long period of time.  It has been working, it no longer is and in the business of trading how do you know something is not working, because you are losing money.  The trade is beginning to fail and that simply is what happened.  The trade began to fail after months and months of working inexorably and rather, for the lack of another term, blithely in my favour.

GEOFF CANDY:  Do you think this has much to do with, if we look at the ways in which gold is being bought over the last few weeks or months, I suppose, a lot of the selling was coming on the US side of things and as Europe and Asia woke up, then buying would resume and partly because I think there were a lot of fears going on within the Eurozone in particular.  Have some of those fears now abated and as a result of that people aren't quite as focused on gold?

DENNIS GARTMAN:  I think that's a very good explanation.  Clearly the worst fears of Europe, which may eventually bubble back to the surface - let's not consider the fact that all of the times that Europe was going through earlier this Spring are suddenly removed.  They might come right back again and if they do then I will be right back to my old position - but for whatever reason, and perhaps it is simply because the Europeans put into effect a series of stress tests on their banks, the results of which we will find out on Friday.  That alone has removed some of the doubt, some of the concerns, some of the panic that was clearly evident as the euro traded all the way down to 119 at one time, a month and a half ago.  So let's simply say that the worst fears have not come to fruition and the bank stress test has allowed everybody to take a deep breath, sit back and say well maybe the worst is not going to happen.  I still have my doubts as to whether the worst has been seen.  I still think the European economic circumstances are clearly worse than in the United States.  I still think the euro makes newer lows but for right now the market says maybe not.

GEOFF CANDY:  Talking about that and looking across the ocean to the US, there has also been quite a lot of talk lately about a possible second dip into recession, particularly for the US but that would surely have repercussions for the rest of the world as well.

DENNIS GARTMAN:  Obviously, China and we are the motor forces in the world and a double dip in the United States, which is an extreme rarity.  It doesn't happen very often and indeed in my recollection the only double dip that we ever had where a recession followed hard upon another, within less than a year was back in the early 1980s.  That's possible here but I have my doubts, that that is likely, given who is at the helm of the central bank.  I think Mr Bernanke understands clearly that any further weakness in the economy, any further signs that consumer spending is falling, any further weakness in the housing market, any further declines in durable goods, will mandate that a new round of over-easing, a new round of FED activity, a new bout of FED buying of treasury securities and agency securities and even perhaps corporate securities is around the corner, so I doubt seriously that a double dip is likely.  It happens, it's rare but I would not place great odds on that.

GEOFF CANDY:  What would you place great odds on at the moment?

DENNIS GARTMAN:  I would place great odds that the economy will quietly move higher, that global economic circumstances will quietly get better.  That the era of 4% and 5% GDP growth in the United States is probably not going to be seen again in a very long period of time - but can we see 1% and 2% sustain GDP growth which is very tepid and not likely to do much at all to the unemployment rate - is that the greater likelihood, yes I think that's the greater likelihood?

GEOFF CANDY:  What would that mean for the gold price?  What would gold do in that sort of scenario?

DENNIS GARTMAN:  Probably not much.  Probably not move higher, not much lower, probably just simply go sideways.  What is disturbing to me and what bothers me is that the monetary aggregates, despite what everybody wants to tell you are simply not growing.  The adjusted monetary base, which is the aggregate that I pay the most attention to, as reported by the Federal Bank of St Louis, has gone sideways, in fact it's even very slightly lower since October of last year.  That's not what we should see.  I understand that there will be many that will say yes, but in 2007, 2008 and 2009 the base exploded on the upside and that is in fact correct.  There may be some of that explosion is being worn off, but I would much prefer, thinking that that explosion in the base was a response to the banking crisis, that that money has to remain in the system, perhaps almost permanently, and I would rather see very quiet 3% to 4% growth in the adjusted monetary base, which would be correlative with 3% to 4% GDP growth.  Instead, we are seeing negative growth in the monetary base and that to me argues instead of inflation - it argues instead of deflation, it argues at best for tepid slow, economic growth and I would prefer to wait and see.  I hope I see much better activity, much more historically proper 3% to 4% growth in the adjusted base.  I hope that's coming.

GEOFF CANDY:  You spoke earlier about the US and China being the two motor forces in the global economy.  There has also been talk about China and concerns that perhaps its economy is slowing somewhat and that's effectively because of the strong action by the Chinese government as well to slow down the economy.  How is that going to play out and what role is China likely to have going forward? 

DENNIS GARTMAN:  I worry about the Chinese officials and how they respond to inflation, deflation, to unemployment, employment, to all of the exigencies of economics.  I worry about them because they tend to take a 2x4 to the head of the economy.  Rather like taking a 2x4 to the head of a mule and try to get its attention.  That's what the Chinese monetary authority seems to do.  They are very quick to raise reserve requirements, which I have always said are the bludgeon that other central banks use.  The Chinese seem to use reserve requirement increases or decreases relatively quickly and I wish they would be somewhat slower in their responses.  Clearly, they were concerned about a bubble in building activity in Shanghai and Beijing and Guangzhou.  Clearly they were trying to slow that down.  Certainly last year they were worried about the too rapid rise in stock prices.  Well look what too rapid rise in stock prices and their bludgeoning response to it by raising reserve requirements got them - a collapsing stock market instead.  I am somewhat concerned about a slowing economy in China but let's be honest a slowing economy in China, first of all have we any idea really within 5% points of what GDP growth is in China and the answer is no we have not.  We haven't the slightest idea, so was GDP last year 10% to 15% growth - probably somewhere within that number.  Can China grow this year between 5% and 10%, probably somewhere within that number?  Do I think that China has grown 15% last year and has grown 5% this year, I doubt that but is it possible?  It's possible.  We have no idea what the numbers are.  All we know is that China needs something between 8% to 10% growth just to make sure that it employs a continued movement of people from the western provinces which are poor and desert, to the eastern provinces which are strong and relatively vibrant.  That's what we really have to be concerned with.  Is Chinese GDP growth going to be above 10% this year - I doubt it.  Is it going to be below 7% - I doubt that.  Remember a recession in China at this point would be growth of less than 7%. 

GEOFF CANDY:  Just to close off with - if we look at where gold was a month ago, today it was at its all time high.  It has come off considerably since then and there is a lot of talk that perhaps this is just a consolidation and given the scenario that you painted for us, would you go along with that?

DENNIS GARTMAN:  Yes, I wouldn't be surprised to be honest if spot gold as I am looking up at my call machine right now is trading at $1191.  Would I be surprised if gold were to trade between $1225 and $1100 for the course of the remainder of this year - I wouldn't be surprised at all.

GEOFF CANDY:  Are you looking at the dollar and the euro still as the most important cross to look at when considering thing like gold or other - Renminbi and the rupee and currencies like that starting to play more of a role. 

DENNIS GARTMAN:  Its interesting - I find myself watching the Renminbi more than I did - we have to now because the Chinese have de-pegged and they are on their way slowing but surely towards a freely floating Renminbi.  It will happen sooner rather than later but it will happen slower than the American government would like and probably about the same speed the Europeans would.  So I watch the Renminbi very closely.  What I probably pay more attention to than anything is what the euro-yen cross is doing because the correlation between the euro-yen cross and equities prices around the world at least for the past five years has been uncommonly tight.  I pay a lot of attention to what the euro-yen class is doing.  I find myself paying less and less attention to the euro itself because quite honestly it is not as important as a reservable asset as it was two years ago and it will be even less important as a reservable a year and two years forward.  The dollar will continue to remain the world's predominant reservable asset.  Gold is quietly becoming a reservable asset and honestly in 10 or 15 years it will be the US dollar, gold and Renminbi, which will be the major reservable assets.  Take that as you wish. 

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