Gold Signals Returning Commodities Strength

By: Donald_W_Dony

KEY POINTS:
• Weaker U.S. dollar in March spells increasing stability in commodities
• CRB still pinned under 240 resistance level; more range trading expected
• Gold advance anticipated in early April; first target is $1,000 to $1,025, second is $1,200

• Copper continues base-building; early evidence of growing strength in the business cycle
• Base metals continue stabilizing into 2nd quarter
• Natural gas hits long-term support level of $4.40; will it hold with lower demand?
• Oil remains flat with $33 to $36 key support
• Agricultural grain prices slowly emerge from support; soybean leads; upward pressure expected in spring

I am forever fascinated by the markets. Although events and causes may be in constant flux, the overall effects continue to repeat themselves. Commodities are a good example of the perception.

Going down means going up
Near the end of the last great bear market is 2002, the decline of the equity markets was largely driven by the bursting of the tech bubble. The U.S. dollar was steadily accumulating an enormous debt. Although the amount was only $3.5 trillion, it raised considerable concern in the FX market. Currency traders began to sell off the dollar in early 2002, from its high of more than $1.25 to a low of $1.02 by the end of the year. Equity markets, in the meantime, finally found a bottom in October.

Commodities, normally a late-performing group, led the stock market by 12 months. Gold, the most sensitive to the movements of the dollar, reached a low seven months before the Commodity Research Bureau (CRB) Index and 19 months before the S&P 500 (see Chart 1). Fundamental demand for natural resources was still extremely weak, but prices rose on the expectation of a lower greenback.

Today’s scenario is not much different. Although the causes of this severe bear market are from the housing and financial markets, the effects are closely related to 2002.

Gold bottomed in November 2008, and the CRB hit a low in December. The stock market can be expected to remain volatile for the rest of 2009, with a potential bottom in October (read the “Equities” section for more information).

The U.S. dollar, which is buried under more than $11 trillion of national debt now (the prime driving force for commodities at the moment), is expected to trade lower throughout March and into April. Models (see Chart 2 on page 2) are indicating downward pressure for the next six to seven weeks, with a target of $0.80 to $0.81.

Presently, the global appetite for commodities is deeply depressed, but the recent strong breakout in gold, stability in base metals and slow rise in soybean, corn and wheat

Additional research can be found in the March newsletter. Go to www.technicalspeculator.com and click on member login.

Your comments are always welcomed.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2009 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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