It or that?

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Senior Member
Japanese and Japan
The passage below is part of what I transcribed, listening to a radio program. The blank below is where I got stuck. The commentator is talking about the expression “…my dear Watson.”

I couldn’t catch what is said for the blank below. Which, #1 or #2 below, do you think should come more naturally there?
1. it
2. that
“Why is this beer so cloudy, Holmes?”―”Sedimentary, my dear Watson.”
This one is pretty good because if you've ever read the Sherlock Holmes stories in English, you'll notice ( ) Dr. Watson often asks him questions: "Why? Why, Holmes, why?" And Sherlock Holmes often introduces his answer with "Elementary, my dear Watson."
It sounded like #1 to me, but I’m wondering if it should have been #2.
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