Gartman: Gold Jump "Sustainable"
Tuesday, 6/24/2014 11:20
Veteran trader bullish stocks, won't touch platinum or palladium...
DENNIS GARTMAN is the man behind The Gartman Letter, a daily newsletter discussing global capital markets.
For more than 20 years, The Gartman Letter has tackled the political, economic and social trends shaping the world's markets, and Gartman himself is a frequent guest on CNBC, Bloomberg and other financial media outlets. Here he talks to HardAssetsInvestor's managing editor Sumit Roy about gold's big move, and how Iraq's oil production will be disrupted by the newest conflict there.
HardAssetsInvestor: Gold surged today [June 19]. We're seeing it up $43 per ounce after this week's dovish comments on interest rates from the Fed. Is the Fed making a mistake here by not acting more aggressively to raise rates?
Dennis Gartman: No, the Fed is not acting irresponsibly or wrongly at all. One, they told us that they were going to wait until inflation numbers were above 2%. And they didn't tell us they would raise rates on the first month that inflation numbers were above 2%.
I think Dr.Yellen made it clear this week in her commentary that it could be above 2% for several months. It has to prove that it's above 2% before the Fed begins to tighten monetary policy.
She's laid down a reasonably facile rule. If the inflation rate, measured by the personal consumption expenditure (which is their preferred methodology) remains above 2% for, let's say a quarter, then I suspect the Fed will err on the side of tightening.
Do I think that they made a mistake? No, I think they're being consistent with previous statements.
HAI: As for gold, do you think today's [June 19] spike has any significance?
Gartman: The fact that you're breaking out to the upside is very significant. The chartists are going to love what they see in the gold market. If you take a look at gold, you've got three things that are driving prices higher. One, the Dollar has gotten weaker. Two, crude oil prices have gotten stronger because of the circumstances politically in Iraq. And three, Dr.Yellen's comments yesterday [June 18] were indeed semi-dovish.
All of those things together have given you an impetus to take
gold prices higher. Yes, I do think this move is sustainable.
HAI: What do you think will happen with the deteriorating situation in Iraq?
Gartman: It's abundantly clear that Iraq as we know it will cease to exist in the not very distant future – probably within the next year and a half. It'll have to be split, as it should have been split years ago. The British created a country out of fiat and it's shocking that it has been able to survive as long as it has.
There will eventually be a Shia southern Iraq. There will be a Sunni landlocked middle of Iraq, and there will be a Kurdistan. You have three groups who have been living with one another, tolerating one another, and despising one another for centuries under one amalgamated country.
It'll split up into three different segments; again, a Shia south, a Sunni interior and a Kurdish northern area. It has to happen that way; to think that it won't do that is naive.
HAI: If that happens, one can assume there's going to be some fighting along the way, especially given that the Sunni middle doesn't have much oil. Do you think Iraq's production is going to be disrupted? And if it does happen, how high can oil go?
Gartman: It'll be disrupted. It won't be terribly disrupted for a long period of time. It serves nobody's best interests to have it disrupted for any protracted period of time. And even if there is a Sunni interior that's landlocked, pipelines go across it.
And the only way that you can move either what will eventually be Kurdish oil or even Shia oil is via pipeline (although the Shia oil can move out through the Persian Gulf). What comes out of Kurdistan is going to have to go across some part of a new Sunni landlocked area via pipeline. And they'll charge transit fees.
There will be some disturbances, but I doubt they will last more than several weeks at most. How high can crude oil prices go? You could get $125-130 nearby Brent futures prices for short periods of time.
HAI: Natural gas has been relatively quiet. There continues to be a big battle between bulls – who are pointing to the huge storage deficit – and bears – who are pointing to record production and these triple-digit bills that we're getting every week. Which side is going to win out?
Gartman: I'm not sure that either side wins out. I think that the market is happy to have natgas at $4.35 to $4.75 in nearby futures. It's comfortable at those levels. I don't see that either side is going to whack the other and prevail.
If you could get the deferred futures to go into a slight contango, everybody would be happy because then hedgers could actually sell natural gas forward and continue to drill and earn that contango. That would be the only thing that I think could end up happening.
Yes, if we have an extremely hot summer, and demand for marginal air conditioning requirements increases, and we continue to have the eco-radicals putting downward pressure upon coal usage, you could get spiky periods of time.
But almost everybody, whether you're a producer of natgas or a user of natgas, is happy if "natty" stays between $4.50 and $5. And I bet it does for a long time.
HAI: Do you have any thoughts on palladium, which hit a 14-year high earlier this month? It's since come off a little bit on news that the South African labor strike may be ending.
Gartman: I will let palladium be traded by people wiser or younger than I am. When you're trading palladium or platinum, you're trading rumor as to whether the strike will end or whether the strike won't end. And if the strike ends, is the union leadership strong enough to get everybody to go back into the mines, or are they not?
If you want to trade that market, I wish you great good fortune, and I wish you great health. I won't even touch it.
HAI: Finally, the S&P500 has been on an absolute tear recently. It's up 6% this year. We haven't seen a significant correction in who knows how long. How are you looking at this market? Do you recommend just riding the trend, or should we be more cautious?
Gartman: It's a bull market. It's moving from the lower left to the upper right. You have to err on the side of buying any periods of weakness. Very smart guys have been trying to sell it short and have called this a false bull market predicated only upon Federal Reserve monetary policies. I think that, clearly, the Federal Reserve is one of the major sponsors of the rally, but the economy is indeed doing better and earnings are in fact stronger.
It's still a bull market; it will continue to be a bull market. You can write this down: It will continue to be a bull market until it stops. And you won't know it's stopped until you've missed the top by two or three months afterwards. And even if you miss the top by two or three months, you've probably done a very, very good job.
Very smart people, guys that I've looked up to for years, have tried to pick a top in this market for the past year and a half. And some have been adamantly and relentlessly and consistently bearish; and they have been adamantly and relentlessly and consistently wrong.
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