SOFTER DOLLAR BOOSTS COMMODITY MARKETS -- GOLD AND GOLD STOCKS ARE TURNING UP -- SILVER OUTSHINES GOLD -- BUYING DOW DIAMONDS TO PLAY IT SAFER

LOWER RATES WEAKEN ... Just a day after a report showing a big jump in sales of previously owned homes during February, we read today that new home sales tumbled 10%, which is the biggest drop in nine years. Personally, I think the latter number makes a lot more sense in a climate of rising bond yields. Over the short run, however, the weak housing numbers are pushing bond prices higher today and bond yields lower (price and yield are mirror images of each other). That's because a weaker housing sector could restrain future Fed tightening moves. Today's drop in bond yields gave a boost to the stock market. This article, however, is going to deal with the impact of rates on the direction of the U.S. dollar, commodity prices, and gold stocks. The first two charts compare the 30-year T-bond yield (Chart 1) to the U.S. Dollar Index (Chart 2). You'll see that they've been trending in the same direction. Last Friday I explained how the dollar followed the direction of U.S. rates (March 17, 2006). Rising rates normally strengthen the dollar, while falling rates normally weaken it. The two charts show both peaking last November, bottoming during January, and weakening today. The dollar is also being hurt by rising European rates and talk of rising Japanese rates. I also wrote last Friday that a weaker dollar should boost commodities.

Chart 1

Chart 2

CRB BOUNCES OFF 200-DAY LINE... While the U.S. Dollar Index is struggling to stay over its 200-day average, the Reuters/ Jefferies CRB Index is continuing to bounce off that long-term support line. At week's end, twelve of the nineteen commodities are in the plus column with the biggest percentage gains in nickel, aluminum, gold, silver, gasoline, and crude oil. [Copper hit a record high on Thursday, while silver hit a new 22-year high]. Yesterday I showed energy ETFs rallying on the back of a $2 gain in crude oil. A weaker dollar and rising energy prices are helping to push gold up $9 today and gold stocks up 3%.

Chart 3

FCX AND NEWMONT BOUNCE OFF 200-DAY LINES ... Back on March 14, I showed these two mining stocks bouncing off long-term support at their 200-day moving averages (March 14, 2006). I also pointed out that oversold readings on the Commodity Channel (CCI) Index suggested that the two stocks were bottoming. Charts 4 and 5 show the action since then. I also expressed the opinion that "since both are included in the Gold & Silver (XAU) Index, their rising action suggests that the decline in the XAU may be about over". That now appears to be the case.

Chart 4

Chart 5

GOLD AND STOCKS TURNS HIGHER ... The next three charts appear to support the idea that the downside correction in gold and gold stocks is over. Chart 6 shows the streetTracks Gold Trust Shares (GLD) climbing over its 50-day average today. The price pattern since the start of February now has the shape of a consolidation pattern of the "flag" variety. [A flag is marked by two declining and parallel trendlines and usually represents a pause in an ongoing uptrend]. The CCI line on the top of Chart 6 has moved back over the zero line which suggests upside momentum, and the daily MACD lines (below the chart) appear to be turning higher. Chart 7 shows the XAU Index breaking through the dashed 20-day average for the first time in six weeks. Its short-term indicators are also turning up. While the XAU still has a ways to go to reach its 50-day average, the Gold Bugs Index (HUI) is close to breaking through that resistance line (Chart 8). Speaking of lines, the HUI has already broken its two-month down trendline. Its RS line is doing the same. The daily histogram bars at the bottom of Chart 8 have crossed over the zero line for the first time in nearly two months. [Gold has done better than gold stocks during the recent correction, which I also wrote about on March 3].

Chart 6

Chart 7

Chart 8

SILVER OUTSHINES GOLD ... I showed this same chart on March 3 to demonstrate that silver was in a strong bull market of its own. The monthly bars in Chart 9 show silver trading at the highest level since 1987. The relative strength below the chart is a ratio of silver divided by gold. The ratio shows that silver has been playing catch up to gold since 2003 after lagging behind the yellow metal from 1999 through 2002. That means that silver is now rising faster than gold. Unfortunately, the much-anticipated silver ETF isn't available yet. But the March 3 report showed two silver stocks that continue to do quite well. Both are in the XAU Index.

Chart 9

TWO SILVER PLAYS ... We sometimes forget that the XAU is called the Gold & Silver Index. That's because most of its component stocks are primarily gold miners. The next two charts are more closely tied to silver. Not surprisingly, they're doing better than the gold stocks at the moment. I'm showing longer range versions of both stocks than I showed back on March 3 to put them in better historical perspective. Back on March 3, Pan American Silver was just breaking out of a bullish "triangular" pattern. It's now setting new records. The relative strength ratio beneath Chart 10 divides the silver stock by the XAU. The rising ratio shows that PAAS has been doing much better than the XAU especially since 2003 when silver started to outpace gold. Those who find PAAS too high might want to examine Coeur D Alene Mines in Chart 11. CDE is trading at a new two-year high and is moving up to challenge its early 2004 peak at 7.69. Its relative strength ratio also shows that the stock is doing better than the XAU.

Chart 10

Chart 11

DOW DIAMONDS ARE DOING BETTER ... On Wednesday I wrote a piece on why Dow leadership was an early sign of an increasingly cautious market (March 22, 2006). I compared the relative strength of the Dow to the Nasdaq market to show that Dow outperformance usually coincided with a weaker market. I ended by suggesting that investors might be wise to add more blue chips to their portfolio. There's a simple way to do that. Chart 12 is a ratio of the Dow Diamonds (DIA) divided by the S&P 500 SPDRs (SPY). I've drawn a down trendline over the ratio peaks starting in March of last year. The Dow clearly underperformed during that time span (as it has since the market bottomed near the end of 2002). To the bottom right, however, the DIA:SPY ratio has broken that yearlong down trendline. That's not a lot to go on, but it's a early sign that investors may be starting to rotate toward the safer haven of the Dow blue chips. The simplest way to take advantage of that new trend is to buy some Dow Diamonds (DIA) which allows you to buy all 30 Dow stocks with one trade. That allows you to participate in the market while, at the same time, turning a bit more defensive. Dow percentage leaders for the week were AT&T, General Motors, JP Morgan, 3M, and Wal Mart.

Chart 12