Commodities investor Dennis Gartman recently told CNBC that he has become more bullish on gold. While he says he is not a gold bug and doesn’t think the world is coming to an end, he does see inflation beginning to pick up.
Of course, most people don’t think the world is coming to an end, including most gold investors, although there probably are a few out there who think that. But if you think disaster lurks, then you might want to buy extra food before going to gold.
Gartman said in the interview that he was previously bullish on gold only in terms of yen and euros. But his opinion has changed, and he is now also bullish on gold in terms of the U.S. dollar.
For Americans, we tend to view the financial world in terms of dollars. So in terms of the dollar, gold was generally not performing well as an investment over the last several years prior to 2016. But we must consider that the dollar had been strong for the last several years as compared to most of the other major currencies. Therefore, in terms of yen and euros, gold was not a bad investment last year.
Now that the dollar has shown a little weakness, it has helped push gold prices higher (again, in dollar terms). But gold’s rise so far in 2016 is not primarily due to the small (and probably temporary) decline in the dollar. It is likely due primarily to increased demand.
I am bearish on the dollar in the long run because of the massive debt load and the unfunded liabilities. I believe the Fed, at least to a point, will try to use monetary inflation as a way to solve these problems, or at least delay the inevitable. It won’t solve the problems, but it doesn’t mean they won’t try.
Over time, I also expect the dollar to slowly lose its status as the world’s reserve currency. It won’t be replaced by another fiat currency, but it just won’t be used as much as a middleman for international trade.
But in relation to other currencies, I expect the dollar to remain strong in the near term. It is hard to believe, but the Fed has one of the more sane policies right now. The Fed has kept the monetary base stable for over a year and a half now. And while its target interest rate remains low, it is not in negative territory as we see in Japan and parts of Europe.
Real Interest Rates and Real Inflation
It is interesting that Gartman said that he sees inflation “beginning to pick up incipiently at the margins.” According to government data, the consumer price index (CPI) remains relatively low. It is still well below the Fed’s target of 2% price inflation. The median CPI is at 2.4% year-over-year, but that has been there consistently.
The actual price inflation rate is probably higher than what the government tells us. It is impossible to have a perfect measure because price inflation is different for different people. Some people drive more. Some people eat more. Some people have more children and pay more for medical care.
Health insurance is likely vastly underweighted in the statistics, and we know that rates have been going up in the double-digits annually for most people, especially when you consider that the insurance plans cover far less.
Still, the CPI statistics are useful in measuring trends, and I don’t see that much of a change in the trend.
In Gartman’s interview, he also indicated that low interest rates can be a problem for gold prices because they are deflationary, especially when people take their money out of banks and hold cash. But for Americans, this really isn’t the case at all. Some cash goes to foreign countries, but this has been happening for a long time. And while Americans will always use some cash, most of the big money players still have their money in the banking system.
In terms of lending, Gartman is correct in saying that a lack of lending is deflationary, or at least not inflationary. The banks have piled up excess reserves, which means this money is not being lent out and multiplying through the economy. But the low interest rates aren’t driving the lack of lending. If anything, you would think that lower rates would spur more lending.
If you want to look at something more relevant, real (inflation-adjusted) interest rates will tell you more. While the price inflation numbers are low, they are often exceeding actual interest rates, especially short-term interest rates. When you have negative real interest rates, this has traditionally been bullish for gold.
If anything, price inflation rates will actually drive interest rates to a certain extent. If the price inflation rate rises, or there is a perception that it will rise, this will drive up interest rates to compensate lenders, who will be receiving back money at a later date that has depreciated.
You can have gold go up with low interest rates or high interest rates. It is more of a question of its relation to price inflation. Gold was going up rapidly in the late 1970s when both interest rates and inflation rates were high. When the Fed slammed on the monetary brakes and interest rates went even higher, that is when the bubble finally popped.
While I am bullish on gold and believe it is an important part of any portfolio, I don’t think we are going to see a wild bull market until we see more monetary inflation by the Fed, or drastically more bank lending.
Until then, we may still get higher prices, but you won’t see anything outrageous or a massive bubble. But it may not be that long before we see the Fed step on the monetary accelerator once again.
