Treasure Chest | Jul 03 2013
By Greg Peel
Respected global financial market traders, business television regular and author of the famous Gartman Letter, Dennis Gartman, was bearish on gold only a week ago at US$1285/oz. Earlier this week he completely changed his mind, describing it at a WATERSHED (his emphasis) change in sentiment.
“We are making this statement and taking this position with a great deal of caution,” wrote Gartman on Tuesday, “but with the knowledge that in the past several decades when we shift sentiment such as this it has proven to be fortunate. We do not make such changes easily nor often, and when we do we realise we are putting a reputation built over nearly forty years hard upon the line”.
While Gartman has been holding a long gold position against the yen for some time to reflect increasing Japanese money printing, he has been short gold in US dollar terms. On Friday he moved to cover his position – not reverse, but cover. Gartman is largely a shorter term trader. He mentioned his trade on business television and was immediately lambasted by subsequent television commentators, who suggested covering gold shorts was a very bad move. Current media commentary is all bearish, Gartman noted, with calls for gold to move “materially” lower.
This is one reason Gartman turned bullish.
Another reason is data from the US Commodities & Futures Trading Commission showing the net short position in US gold futures is now at its lowest level since The Gartman Letter began. This implies that the investor exit from gold is now exhausted (very big shorts were being built up over the last few months) and, more importantly, commercial positions (miner/traders) are at risk of turning net long. This is critical, because commercial positions are always net short given production hedging. Gartman would rather go with the commercials than the investors.
Making Gartman’s call even more of “a leap of faith,” in his words, is that he intends not to buy US dollar gold but US-listed gold miners, noting the leading gold miner ETF in the US has fallen 62% in value as gold has fallen 27%. The ETF is now trading at the same price it was when gold was US$1000/oz. Aside from the price disparity, Gartman’s call is based on the first major write-downs of “ill-timed expansions” over the past several years having begun.
For this Gartman cites first major write-down cab of the rank, Australia’s Newcrest Mining ((NCM)) and the $6bn hit it took recently. Miners are lemmings, Gartman’s experience confirms, and they will wait until one goes before all follow. However, further sector write-downs should not imply further stock price falls. Indeed, the market is pricing in expected write-downs already, and Gartman expects stock prices to hold their ground at what should then be bottom levels.
Gartman’s call also involves technical signals. The gold price has traced out a technical “reversal” to the upside in its significant bounce earlier in the week, and technicals always change before fundamentals do, he notes.
Gartman will continue to stay long gold against the yen, believing the Bank of Japan and the Japanese government “intend to do what they can, where they can, when and how they can to weaken the yen”.
One caveat on Gartman’s long gold stock call is he would only invest in larger miners and not in speculative or highly geared juniors.
Find out why FNArena subscribers like the service so much: "Your Feedback (Thank You)" – Warning this story contains unashamedly positive feedback on the service provided.
