Gold and the Dollar Rise Together

05/18/2010 12:00 pm EST

Focus: COMMODITIES

Eric Roseman

Editor, The Commodity Trend Alert

Eric Roseman, editor of Commodity Trend Alert, says the US dollar and gold are both rallying now, but he wonders how long the trend will last.

Blame it on Greece or an electronic glitch on the New York Stock Exchange. Whatever the trigger, investors this month are selling almost everything and heading to the relative safety of gold and Treasury bonds. Commodities are not being spared.

The benchmark CRB Index [has suffered] one of its worst monthly declines in over 15 months. The S&P Goldman Sachs Commodity Index, which holds a total of 70% in energy futures, is already down a dizzy 9% in May. 

Oil prices have plummeted more than $10 a barrel in a swan-dive following bearish inventory reports. Right now, oil is in a major correction.

The summer is typically a bad time to be invested in natural resources. 2010 is looking like a real bruiser as fears of debt contagion across the euro zone trigger a wholesale panic reminiscent of the 2007-2008 credit crises.

I’m expecting a big rebound for commodities. Oil prices are now heavily oversold short term. Yet longer term, the euro, like the dollar, is heading into the inflationary dustbin, because all of this spending on bailouts will create some enormous inflation down the road. It’s unavoidable.

But for the moment, deflation, not inflation, is our primary concern. As for gold and deflation, look what’s going on. Who says gold can’t rise in a deflation—especially amid a rising currency and sovereign debt crisis?

The entire global exchange rate system is flawed [and] unsustainable and is destabilizing global trade. I don’t know exactly what role gold or silver will play in the next currency regime, but it’s clear to me that we need a new standard of currency. The dollar, euro, and yen won’t cut it.

Can you imagine what will happen to gold prices when, not if, speculators eventually challenge the US Treasury? Unless the US dramatically cuts spending, what’s happening in Greece (and eventually elsewhere across Europe and Dubai) is coming to our shores.

The US Dollar Index remains in an up trend, which is typical price action since the first flames of the credit crisis started in July 2008. As the next phase of the credit crisis spreads to sovereign debt markets in Europe, the dollar is rallying at the expense of other currencies. But what’s truly bullish for us is how gold and the dollar are rallying at the same time—just as they did in 2004.

The Dollar Index continues to trade above its 50- and 200-day moving averages. This is bullish price action. I imagine both the Dollar index and gold will at some point disconnect sharply. The dollar won’t be supported by sharply higher interest rates any time soon.

The Dollar Index is overbought, however, [and] vulnerable to a pullback at these levels, and that will be bullish for gold and silver.

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