Gold's Fate Depends on the Dollar

05/06/2009 10:52 am EST

Focus: MARKETS

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says commodities are in a bear market, and some of the major ones have no chance of advancing until the dollar weakens.

Since stocks hit another intermittent low on March 9th, the Standard & Poor's 500 index has gained a cumulative 30% while commodities have logged less impressive returns; the S&P GSCI has rallied just 6% and the Reuters/Jefferies CRB Index is up 11%.

It's hard to be overly bullish on oil or most other commodities until the credit markets and employment trends hit a bottom in the industrialized world. The dollar also has to decline after posting a spectacular reversal since last July. For now, these prerequisites simply don't exist.

[We are] therefore neutral to bullish on crude oil over the next six months and bullish on natural gas ahead of peak consumption season this summer and possibly, supply disruptions caused by potentially damaging hurricanes later this summer in the Gulf of Mexico. Gas prices are so depressed at these levels that it's incredibly hard not to speculate now. Spot prices have now collapsed about 75% over the last 12 months—a monster crash by any measure.

The dollar's fundamentals don't justify a secular or long-term rally; with interest rates in the US and elsewhere at, or approaching zero percent, the interest rate advantage of holding paper money to gold has been neutralized; in other words, you're not getting paid to hold paper money.

For gold, important support sits at $858 and silver at $12.32 an ounce. Yet as we approach the end of the year, I do expect a final push above $1,000 for gold, and this time we'll build a new formation above $1,000 an ounce. Silver will also come along for the ride and take out $17-$18 an ounce, possibly higher.

Until the dollar begins to decline and the global deleveraging of balance sheets finally concludes, gold and silver will remain hostage to trading ranges. The dollar index must crack below 82 for us to turn more bullish on the primary trend for gold and silver. Thus far, the buck is still strong.

Seasonal strength for gold is typically from October until April, and I doubt this year will be any different considering the dollar's ongoing strength, International Monetary Fund gold sales, and a big stock market rally. One of the best buying opportunities for gold stocks lies ahead around August or September. The last great buying opportunity for mining stocks was last October, as gold stocks more than doubled from early November until April; this year will afford yet another great opportunity. 

In my view, the commodity bull market is dead and will have to be traded carefully on the long and short side—especially amid dollar strength. The good news is that I do expect the dollar to decline significantly over the next six to 12 months as stimulus spending runs dry and the markets grow nervous again. Only this time, the dollar will decline, not rise.

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