CCI at a Crossroads
After a string of positive days for commodities and pms, the commodity index is showing signs that we've reached a key crossroads from a technical perspective, whereby one of the following scenarios becomes likely:
1. commodities correct rather substantally from this resistence in a short-lived reversal, and the USD finds a near-term bid vis-a-vis the Euro. Any counter-cyclical USD rally would be short-lived, and IMO would set the stage for a big September rally; or
2. commodities break through this point and by doing so attract further capital inflows into the commodity space for a sizeable rally. The dollar would continue its slide in this scenario, and this in turn would permit gold and silver to re-board that rocket launch into the next parabolic up-leg that was aborted with seconds to spare back when the cup-and-handle set-up was screaming breakout in June. Since then, the COT data show that shorts in multiple categories have closed out their positions en masse and moved to resounding long positions. In June, a breakout would have been at the expense of the shorts, whereas no they are positioned to profit... and the bullion banks will always profit in the markets they manage.
[The chart is too big for insertion here, so I will paste it in a comment below]
Here is Jim Sinclair's commentary on the currency issue. It's that oversold condition of the USD that makes me fear the possibility that this CCI resistence could potentially hold. Remember, I'm not sayingwhich way things will go in the near-term... but rather I'm presenting my outlook on the key factors in play (both fundamental and technical).
I have received a fair number of emails asking me what is going on with the Euro in relation to the Dollar, especially considering the fact that a mere few weeks ago it was pronounced dead and the European monetary union with it.
What appears to have happened is two-fold:
First, those Euro zone areas that were causing the most trouble, Greece, Spain, Portugal, etc. seem to have been able to sell their bonds, alleviating fears of a sovereign debt meltdown (for now). We all know that a tremendous amount of behind-the-scenes machinations were occurring by the Central Banks and the monetary authorities to insure that the bond sales were not a dismal flop. The repercussions of such would have indeed been earth shattering to say the least.
Secondly, and most importantly, were the comments coming from several US Federal Reserve officials, including Chairman Bernanke, who laid to rest any fears among the hedge fund, hot-money crowd, that the Fed would be tightening monetary policy in any form, fashion or shape anytime soon.
Voila! That was the signal for hot money to pour back into the commodity sector as well as the equity markets. Basically, the Fed has given investors the green light to goose commodities and equities higher and to take the bonds higher as well.
Please note the following chart of the CCI and observe how close it is to making an upside breach of a critical technical resistance level. In regular speak, this translates to a shift by market participants in favor of inflation and away from deflation. We could very well be on the cusp of a Federal Reserve-induced commodity buying binge once again as the Fed works feverishly to avoid deflation.
They should be careful what they wish for.
Lastly, the language coming from the Fed has essentially guaranteed low interest rates for the foreseeable future which totally takes the props out from underneath the US Dollar. That is why it is getting sold off. What investors are looking at is a global economy which is basically two-tiered. One tier is the West, particularly the US which remains mired in a sluggish growth environment saddled with an extreme level of government debt (Japan for all practical purposes should be included in this category). The other tier is the emerging markets of Asia and to a certain extent, portions of South America. Capital flows will move towards the latter and away from the former which removes an important floor of support beneath the Dollar. The Euro is gaining on the Dollar in more of an aversion to the low interest rate environment guaranteed by the Fed.
The Dollar is extremely oversold and could pop higher almost any time but barring any further dire news out of the Eurozone, it is most likely that its rallies will be short-lived.