Gold and Oil Rise as the Dollar Falls

11/07/2007 12:00 am EST

Focus: MARKETS

Curtis Hesler

Editor, Professional Timing Service

Curtis Hesler, editor of Professional Timing Service, says we may see continued strength in gold and oil, but thinks a correction is likely when the oversold dollar rallies.

There are simply too many bullish factors underpinning the gold market to bet against higher prices. As the dollar falls, gold will rise-and that relationship is cast in stone.

The principal reason for the dollar's current fragility is the Federal Reserve's move to lower interest rates. Lower rates have worked to make an already unattractive US dollar even less attractive. Frankly, I think the Fed is on board with a weaker dollar. They just don't want to see a rout.

The Fed got the dollar bear rolling again once they began cutting interest rates in August. It is interesting that this new "dollar killer" policy of lower interest rates also coincided with the beginning of the most recent gold rally. Throw in a few central banks around the world who are tired of holding too many depreciating and low-yielding US dollars, along with some geopolitical uneasiness in Turkey and Iran, and the recipe calls for the dollar to fall at least another 25%.

The dollar is quite oversold, [and] you should be looking for a trading rally-an upside correction to this most recent decline. I don't look for it to be a big deal. The Dollar Index could perhaps move as high as 80.00, where long-term support was for many years; and once support is broken, it then becomes overhead resistance. (It traded in the mid-$70s recently-Editor.)

The Dow/gold ratio simply compares the ultimate paper asset, the Dow Jones Industrial Average, with the quintessential real asset, gold. The Dow/gold ratio peaked out in 2000 at over 43, which indicated that equities were way overpriced compared to tangibles.

Once the ratio tops out, it will continue lower until it falls below 5. Until we see the ratio-now at 17.5 and heading lower-break under 5, there is no need to worry about the commodity bull being over. I don't see that for another 7 to 15 years.

Crude oil, like gold, has been on a tear. It broke over $93 a barrel recently, and it doesn't seem to want to let up. I have been talking about $100 oil all year, and we are nearly there now. So, what's next? Crude oil is being pushed higher by many of the same forces that are responsible for the rise in gold this fall-a weak dollar, foreign unrest in the Middle East, etc.

Although it is nice to say that the surprises will always be on the up side in the commodity markets, the technical picture for crude oil looks very much like that in gold and inverse to what we presented for the dollar: new highs are not being confirmed by our indicators, and it is time to sit back and wait for a correction before aggressively buying any more energy stocks.

Subscribe to Professional Timing Service here...

Related Articles on MARKETS