DOLLAR DROP BOOSTS GOLD AND OIL -- DOLLAR HURT BY DROP IN PURCHASES OF U.S. ASSETS
FOREIGN PURCHASES OF US ASSETS ARE SLOWING... The recent bounce in the dollar -- and the pullback in foreign currencies -- didn't last long. The dollar is falling sharply again today and foreign currencies are jumping. Chart 1 shows the Euro having bounced off initial support at its (dashed) 20-day moving average. Chart 2 shows the Japanese Yen bouncing off its 50-day line. Part of the reason for today's dollar drop is a government report showing that foreigners are slowing their purchases of U.S. assets. Foreign buying of American bonds and stocks during October was at the slowest pace in a year. That creates a vicious cycle. A falling dollar discourages foreign buying of U.S. assets. Less demand for U.S. stocks and bonds reduces the demand for dollars. I had suggested awhile back that there were two side-effects of a weaker dollar. One was the flight of global capital to foreign markets, which we're beginning to see. The other is higher commodity prices. We're seeing that today as well. Gold and oil are bouncing along with most other commodities.
Chart 1
Chart 2
CRUDE OIL JUMPS $2.00 ... On Monday I repeated my view that $40 would act as a floor under the oil market. So far the $40 level is holding. A drop in heating oil inventories is pushing crude more than two dollars higher today to put it back over $44. That also keeps crude over its late August low near $41 (see black circle) and its 200-day moving average (red circle). I also suggested on Monday that colder weather in the northeast was starting to pull heating oil and natural gas prices higher. A drop in heating oil inventories today is pushing heating oil futures 5% higher, which is leading the energy complex and the CRB Index to impressive gains. Gold is having another strong day. Gold and energy stocks are today's market leaders.
Chart 3
GOLD IS BACK OVER $440... Gold is bouncing nearly $5 today and is back over the $440 level. That's important because it keeps bullion over its 50-day moving average (see blue arrow) and chart support along its early 2004 highs just over $430 (see circles). A rebound off that new gold floor was necessary to keep its uptrend intact. Today's drop in the the dollar is bullish for gold. Silver prices are also rallying. As are most commodities.
Chart 4
CRB INDEX BOUNCING OFF 200-DAY LINE... At the start of the week I showed the CRB Index starting to bounce off its 200-day moving average. It's extending that gain with a jump of 5.28 points today. That puts the CRB in striking distance of its 50-day average. Today's CRB rally is pretty broad with thirteen of its seventeen commodities showing gains. Naturally, that's giving a nice boost to commodity-related stocks like gold, energy, and basic materials. Earlier in the week I suggested that it might be time to do some more buying of commodity-related assets. One of our readers asked what that included. For a more comprehensive answer to that question, please refer back to a message that I wrote on November 22 entitled: "How To Play Hard Assets With ETFs and Mutual Funds -- New Gold ETF is Launched" (November 22, 2004).
Chart 5
