Looks Can be Deceiving

The US Dollar has continued its recovery, rallying to an 11 month high, which has created an exodus of longs in many commodity markets. Dollar weakness was one of the primary drivers behind the bull run in most markets over the last five years, with rising oil prices a close second. The Dollar Index fell roughly 40%, or 50 points, from its highs in 2002. The current rebound is about 8 points, or a 16% reversal of the 50 point drop.

Oil prices peaked a scant 2 months ago near $146 a barrel, at a time when many analysts were predicting $170 and $200 prices were just around the corner. Gold had lagged oil’s rise to new record highs but was closing in on its March high of 1030, leading some analysts to predict new highs at 1200 were in the wings. Neither of those possible scenarios occurred as the markets took a detour to the downside.

Gold may not have found solid footing yet, but it is important to keep in mind we are approaching the end of the usual summer doldrum cycle and markets can spring back to life quickly, as in past years.

Oil prices are approaching major support at $100 a barrel and are vulnerable to the upside, due to supply disruptions that can be caused by major hurricanes. The Gulf Coast is in the early stages of this year’s hurricane season and it is possible that a major storm may inflict damage to refineries and offshore drilling rigs in the area.

Several other wildcards appear to be in the deck to be dealt, as well. North Korea claims to be resuming its nuclear ambitions as negotiations to end that program are meeting with failure. Iran has been undeterred in its nuclear development agenda by economic sanctions and threats of stiffer sanctions. Israel has made clear its intentions to prevent Iran from becoming a nuclear threat. Russia, formerly thought to be a sleeping bear, has come out of hibernation by making an incursion into Georgia. Russia’s recent military action may be a warning growl that it will not sit idly by and allow proposed NATO missile defense systems to be deployed in Poland or military action against its ally Iran to occur without repercussions.

We recommend adding conservative long exposure in physical Gold positions below 800 on a fully paid basis at this time. Support at the 772 level held several weeks ago and may be tested again. Further evidence of bottoming is needed before we would recommend aggressive long positions.

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The information and opinions contained in this report have been obtained from, or are based on, public sources believed to be reliable, but no representation or warranty, express or implied, is made that such information is accurate, complete or up to date and it should not be relied upon as such. This report does not constitute a prospectus or other offering document or an offer or solicitation to buy or sell any securities or other investment. Information and opinions contained in the report are published for the assistance of recipients, but are not to be relied upon as authoritative or taken in substitution for the exercise of judgment by any recipient, are subject to change without notice and not intended to provide the sole basis of any evaluation of the instruments discussed herein. Any reference to past performance should not be taken as an indication of future performance.