While Gartman is Goldless, I Still Itch for Commodities

In late June, I had high hopes for a new break-out in gold. It is now flat for the year again and sits at critical support levels (see chart below) as new hopes surge with the dollar bulls.

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And just as I lick my chops for a new entry point in gold, I discover that the venerable Dennis Gartman has purged himself of all his holdings in gold (see Fast Money, August 8, 2008). I have much respect for Gartman's opinion, especially his calls on commodities of all stripes and shapes. So, I find myself gulping hard and forced to review one more time my bullishness on gold.

1. I still have little faith in the U.S. dollar.
2. A weak dollar has been the only thing propping up the American economy, and there is nothing ready to replace a weakening in exports and international sales. The government will likely "balk" if the market tries to call its bluff on the "strong dollar policy." (Quick sidenote: I love how so many pundits are quick to switch from saying a weak dollar is bullish to saying a strong dollar is bullish for the stock market - even as the strength seems to be from a weakening European economy that is pushing down the Euro. A weak Europe could amplify U.S. weakness as the U.S. loses a key export market and competition increases to export to Asia).
3. The dollar remains in deep bear market territory, and the sharpest rallies tend to occur in bear markets. Sure we can stare hard at the chart of the U.S. dollar and believe that this time a breakout from an apparent consolidation pattern will hold a bottom, but massive resistance remains overhead. I think much more consolidation is required to overcome this.
4. The U.S.'s massive deficit looms as the trigger point for the an upcoming phase of our ongoing financial crisis, and I still expect gold to serve as a reasonable hedge against those prospects. Our growing list of bailouts blithely ignores these deficits as we continue to socialize the risks of pursuing speculative profits. The public's eager thirst and attentive ear for more tax cuts during this cycle's presidential campaign also promise to deliver bigger bills for someone's children. More tax cuts always feel warm and fuzzy, but show me the money...

So, far be it for me to argue with Gartman on this one, but my sell trigger is not quite as fast as his.

Next, I will take a look at two more commodity charts: SLV and DBA.

Silver, as represented by the SLV ETF, broke through support on Friday. It is a move that gold seems destined to follow. Silver is now flat for the year. Note that silver has more important industrial uses than gold, so its breakdown could have an even more important story to tell about the health of the global economy.

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Silver miners like Pan-American Silver (PAAS) look even worse than silver itself; PAAS is now down 25% for the year. I am licking my chops at even lower prices for PAAS.

Just four months or so after it seemed like all the world's food was running out and panic grew across the globe, we now find ourselves with plummeting prices for all types of crops. DBA, the PowerShares agriculture fund, looked like it was forming a double-top back in March. After trending down for three months, DBA found new life and challenged that double-top in a one-month sprint. And almost as fast, it retreated and renewed its slide. DBA has broken support and is now flat for the year (notice a theme?).

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So, prices continue to slip quickly in the world of commodities. Rather than filling with fear, I cannot help but instead fill out my wish list and start scraping my pennies together. This latest correction feels more like another liquidation event by big institutions who find themselves trapped in crowded trades as the dollar bounces. This has been accompanied by a massive rotation of funds from commodities to technology and to many financials.

I am not yet sure what will trigger an all-out buy signal for me, but I will look for the kind of deep negativity that I used to trigger purchases of (non-commodity) equities in mid-July. For now, there is still plenty of confidence around that the global growth story will remain intact. I would also prefer an entry-point that provides reasonable risk/ reward in case the next run in commodities stops cold at current highs.

Every now and then, I also see short-term opportunities in commodity-related names. Last time, it was Bucyrus International (BUCY). I am out of that one much sooner than expected. While I was bullish on a rebound when I established the position on August 5, I was quite taken aback by the immediate 8% surge the following day. Given how quickly gains can come and go in this volatile market, I set a tight stop. It was triggered within pennies on Thursday, and on Friday BUCY retraced about half of Wednesday's nice gain. Despite all this, BUCY remains on my commodity buy list, and I will be on the look-out for a new entry point.

(In case you are curious, some of the names I track most closely are (X), (CLF), (NUE), (SCHN), (FCX), (MOS), (MON), (POT), (AGU), and (USO). I am eyeing MOS and MON for a pair trade. I just bought back into (IPI). I am also trying to stay on top of infrastructure plays related to commodity-extraction and usage like (FLR), (SGR), (FTI), (FWLT), and (SLB). I am mostly bearish on coal for now.

Finally, I have been "early" nibbling away at various natural gas names, but I am looking to the "Pickens Plan" to encourage more natural gas consumption and support prices in the future. San Juan Basin Royalty Trust (SJT) is my favorite because of its large dividend yield. (I just bought back into that one).

Be careful out there!