Gartman: Short stocks, long gold

Dennis Gartman of the Gartman Letter was interviewed at Bloomberg yesterday. While making clear that he is not a "gold bug", he makes an astonishingly simple case for why gold is a good investment.

But first, a few comments on the Fed cutting the discount rate:

They've signaled now that when they meet in September they will vote to move the Fed fund rate down for the first time in a very, very long time and it's long overdue. What I've learned in a mere 35 years of watching the Fed is that when the Fed changes direction it moves in that new direction for a long period of time and takes rates much farther than anyone wants to anticipate.

Will they move in December? That's not the important question.

The important question is that their next move, after they ease rates in September, will be to ease again. The move after that will be to ease again and the move after that will be to ease again. You can rest reasonably assured that the Fed funds rate will be markedly lower a year from now than it is now.

On his overall investment outlook:

Right now I am short of stocks, and got that way yesterday, and I am long of gold, and I intend to stay that way. I think the Fed has responded to disconcerting economic news by easing monetary policy and that disconcerting news in the mortgage market is not going to go away anytime soon.

A 25, 50, 75, or 100 basis point decline in Fed funds is going to be a very immaterial consequence to the reset home mortgage owner who's watching his teaser rate go from say, three percent to eight percent. Maybe it goes from three percent to seven percent, but that's not going to stem a large sum of foreclosures in the mortgage market next year.

The Fed has a big job ahead of it to take care of that problem.

On the outlook for gold:

I've been bullish on gold for some period of time simply because of reserve adjustments by the Central Bank of China and the Central Bank of India, Thailand, and Malaysia, all of whom are running large trade surpluses. They find themselves with rather more reserves of euros and dollars than they would like and rather fewer reserves of gold than those held by the central banks of the industrialized world, so they're going to be moving in that direction.

Just last week over at the investment website, Iacono Research, the same observation was made when looking at recently announced central bank sales and overall reserve statistics.

The price of gold has been resilient in recent weeks amid stepped up gold sales by central banks at a time when credit market turmoil seems to be spreading like wildfire. The historically strong Indian buying season will begin in about a month - Indians are, by far, the largest consumers of the metal, making most of their purchases in the fall, prior to the winter wedding season.

Last week it was reported that the Bank of Spain sold an additional 25 tonnes of their gold reserves in July after previously dumping 122 tonnes in this, the third year of the current CBGA. The Spanish Central Bank has been, by far, the largest seller of gold reserves this year and now holds just over 300 tonnes.

Some time ago, some economist somewhere determined that "prudent" central banks should keep 15 percent of their reserves in gold bullion - this is the closest thing to a rule of thumb I've heard and it is the approximate average of ECB member banks. Looking at the table to the right, you can see that Spain may have more to unload along with a few other European countries.

The more significant point to be gleaned from the table, however, is that if Asian central bankers were to develop such Western prudence, they would consume all the gold that the Europeans could offer - China could take all of the U.S. gold reserves and still not be at 15 percent.

This is certainly food for thought and adds to the bullish argument for gold.

Central banks and their gold, here in the early 21st century, is just a fascinating topic.

Do you think western economists and central bankers snicker when the bullion they are selling is scooped up by the central banks of emerging economies?