FALLING DOLLAR HELPS BOOST COMMODITY MARKETS -- GOLD AND OIL INDEXES EXCEED 200-DAY AVERAGE -- GRAINS HIT TEN-YEAR HIGH
THE CHINESE MAY DIVERSIFY AWAY FROM THE DOLLAR ... I've been writing recently about new signs of weakness in the U.S. Dollar. Two side-effects of a weaker dollar are stronger foreign stock markets (especially foreign ETFs) and stronger commodity markets, especially precious metals. Reuters reported today that China may start diversifying their huge currency reserves away from the dollar. China has one trillion dollars in currency reserves which is the biggest in the world. Because of its size, the currency that stands to benefit the most is the Euro. Not surprisingly, the Euro is rallying strongly today (Chart 1). The British central bank raised rates today pushing the Pound closer to its its 2006 high (Chart 2). Commodity markets are up strongly today. Gold is up $18. That's pushing stock indexes tied to those commodities through important resistance barriers.
Chart 1
Chart 2
XAU IS MOVING OVER ITS 200-DAY AVERAGE ... Silver continues to lead the precious metals rally. Chart 3 shows Silver iShares (SLV) nearing a test of the early September high at 132.25. Chart 4 shows StreetTracks Gold Trust Shares (GLD) approaching a similar peak at 63.63. If the SLV can overcome its September peak (which appears likely), the GLD should reach its July peak at 66.42. Gold stocks are up more than 3% as a result. Chart 5 shows the PHLX Gold & Silver(XAU)Index trading over its 200-day average for the first time in two months. That puts the XAU in position to challenge its summer highs in the 150-153 region. Oil stocks are also rallying along with energy prices.
Chart 3
Chart 4
Chart 5
OIL SERVICE ETF CLEARS 200-DAY LINE ... Energy stocks are attracting more money as commodity prices rebound. Chart 6 shows the Energy Sector SPDR (XLE) nearing a test of its 2006 high. Its relative strength ratio has been rising for the last month. The more important technical development, however, may be taking place in the oil service group. Chart 7 shows the Oil Service Holders (OIH) trading over their 200-day average for the first time in three months. The OIH has also broken a six-month down trendline. One of our readers asked about the relationship between energy shares and the commodity. The historical tendency is for the shares to lead the commodity. Chart 7 shows oil service stocks leading crude oil (solid line) lower during the summer. Over the last month, the shares have been leading the commodity higher.
Chart 6
Chart 7
COMMODITY ETF IS TURNING UP ... Commodity prices appear to be on the rise again. There are several Exchange Traded Funds that allow investors to participate in that rising trend. The better knows one are in precious metals and energy (as shown above). Chart 9, however, shows the DB Commodities Tracking Index (DBC) which is based on commodity prices as a whole.
Chart 8
AGRICULTURAL INDEX HITS TEN-YEAR HIGH ... While most of our commodity attention has been focused on energy and metals, the strongest commodity trading is taking place in the grain pits of Chicago. Corn and wheat have reached the highest levels in ten years. That strong action is reflected in the Goldman Sachs Agricultural Index (GKX) in Chart 9. The solid line is a ratio of ag prices to the Reuters/Jefferies CRB Index (which has a relatively small grain weighting). The ratio shows that agriculturals have lagged behind the CRB from 2002 to 2005. During 2006, however, the ag markets have been showing much more strength. Since the start of June, the CRB Index has fallen 9%, while precious metals and energy have lost 2% and 13% respectively. Industrial metals gained 7%. The strongest group was agriculture with a five-month gain of 14%. Unfortunately, I know of no way to participate in the grain markets themselves other than through the futures markets. One conclusion we can draw from the grain rally, however, is that the major bull market in commodities is still intact.
Chart 9
