Commodities Gathering Strength Building on U.S. Dollar Weakness

By: Donald_W_Dony

KEY POINTS:
• Building weakness with the U.S. Dollar Index points to mounting upward pressure for CRB
• Gold and silver lead once more; target is now $980 by March for gold
• Other commodities expected to follow gold’s lead in March/April

• Oil finding solid support at $33 to $36; price stability from lower US$, not demand
• Agriculture gathering buying momentum
• Natural gas remains under downward pressure; building inventories and weak demand keeps it down
• Is copper finding a base at $1.25? Yes.

Commodity prices, in general, are starting to feel the upward pressure of a weak U.S. dollar. The price stability in base metals, oil, corn, wheat and gold are not being created by increased global economic expansion (this will likely begin in late 2009 or early 2010), but rather from the slow rise in U.S. dollar–priced resources. So, an analysis of the fledgling commodity bull needs to start with the primary driving factor – the dollar.

Losing their grip
The U.S. currency is in the middle of a grand tug-of-war. On one side are the fundamentals. They are clearly very negative, labouring under more than $10.6 trillion of national debt and an estimated $800 billion to $1.1 trillion in bailouts and the proposed stimulus package. This, coupled with near zero interest, gives the dollar a quicksand foundation and a long-term downward bias. On the other side of the rope is the ‘flight-to-safety’ crowd.

Some currency traders and fund managers still look at the dollar with a ‘better the devil you know than the devil you don’t’ perspective, which provides upward pull when equity markets start to dive lower.

However, as the bear market is gradually losing its bite –more on that in the “Equities” section of this issue – it would appear that the fundamentals side is gaining ground and pulling the dollar slowly lower ... the ‘safety’ crowd is losing its grip.

Technically (see Chart 1), the U.S. Dollar index is stalling after the ‘flight-to-safety’ rally in the 4th quarter. It is now in a multi-month rolling-over process that began in October 2008. This movement is to continue this February, with prices reaching $0.855 to $0.875. Once the dollar drops
below the $0.80 support line, then the topping pattern will have ended, and the currency is heading down to support at $0.76 to $0.77.

As gold is normally the first to advance within the commodities market, I am looking for leadership and confirmation that this precious metal is breaking out of the long downtrend. And this action appears to be unfolding.

Slow advance
Gold bottomed in November (as the U.S. Dollar Index peaked) and is now slowly advancing (see Chart 2 on page 2). This tells me that, if gold continues to move upward, then other commodities will follow over the next

More information about commodities can be found in the upcoming February newsletter. Go to www.technicalspeculator.com and click on member login.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2009 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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