COMMODITIES CONTINUE TO SOAR ON FALLING DOLLAR -- XAU INDEX BREAKS OUT TO RECORD HIGH -- A FALLING DOLLAR COULD PUSH OIL TO $100

EURO HITS NEW RECORD AGAINST THE DOLLAR ... With all the recent bad news on housing, and increased hopes for another rate cut by the Fed, the U.S. Dollar continues to drop like a stone. The U.S. Dollar Index recently hit a new record low. In today's trading, the dollar is down against all major foreign currencies. Chart 1 shows the Currency Shares Euro Trust (FXE) jumping to a record high against the dollar. As a result, commodity prices (and stocks related to them) are rising strongly as well. Chart 2 shows the DB Commodities Tracking Fund (DBC) jumping nearly 2% today to another record high. Gains are coming mainly from energy, precious metal, and agricultural markets.

Chart 1

Chart 2

PRECIOUS METAL INDEX ACHIEVES MAJOR BREAKOUT... Anyone who things that precious metal stocks are nearing the end of their bull climb should look at the next two charts. Chart 3 shows the PHLX Gold & Silver (XAU) Index having just broken through its 1987 and 1996 highs to achieve a major bullish breakout. That chart suggests that precious metals have a lot of life left in them. A large part of that is due to Chart 4, which shows the U.S. Dollar Index falling to a new record low. The fact that the major upside breakout in the XAU, and the major breakdown in the USD, are occurring at the same time fits into the intermarket principle that the dollar and gold trend in opposite directions.

Chart 3

Chart 4

FALLING DOLLAR SUGGESTS $100 OIL ... If you don't think that a falling dollar is bullish for oil, take a look at the next two charts. Chart 5 shows a near perfect inverse correlation between the Dollar Index (green line) and crude oil (black line) since 2002. That holds true over the short term as well. Chart 6 compares the two markets over the last year. The last two dollar downturns in January and August of this year pushed oil prices to new highs. Oil reached $89 for the first time in history today on dollar selling. Crude oil hit a record high of $40 at the height of the commodity boom in 1980. In current dollars, the 1980 oil high translates to $100. That's probably where oil is headed.

Chart 5

Chart 6