Dollar is in the driver's seat; crude and silver on the skids

By George Albert, Special to Firstpost

The price direction of major commodities in the week starting 23 May depends on the performance of the US dollar. Reason: it was the recent rally in the dollar that stopped and reversed the uptrend in major commodities.

Since a major chunk of the commodity trade is invoiced in dollars the movement of the greenback has a strong influence on the price of commodities. So what's in store for the dollar and the commodities it influences?

US dollar: The dollar index, which measures the greenback against a basket of six major currencies, had a minor correction to its rally last week, providing relief to gold, silver, oil and copper. The recent dollar uptrend is far from over, which should put commodity bulls on notice. The dollar index, which bottomed recently at 72.65, closed at 75.43 last Friday (20 May).

There are two ways of looking at the market - through fundamental analysis and technical analysis. Fundamentals turned to favour the US dollar as debt restructuring issues in Europe came back to the fore. Investors rush to the safety of the dollar when risk in the market increases. Additionally, economic news on housing and unemployment in the US has not been good, which results in investors doving out of equities to cash, increasing the value of the dollar.

Market experts say fundamental analysis tells you what to buy, but not when to buy. For timing the market, investors look to technical analysis. The dollar right now is a good long bet if you had entered it when the index was at the 72.60 level. But going into next week investors must wait for a correction in the dollar index to the 74.50 level before going long (buying, that is). Traders wanting to take quick profits on the short side should wait for the index to hit the 76.25-76.50 range, before taking positions. Unless the dollar index reaches any of these two levels, it's best not to take any new positions.

Investors who are long on the dollar from the 72.60 level are in a good position. They should move their stop-loss to 74.20. A stop-loss is an order given to the broker to get you out of a position if prices fall below a certain level. If the dollar index closes below 74.20, it can go all the way down to 72.60. The buy and sell zones on the dollar are high-lighted in green and red respectively in the chart nearby.

View Chart

Crude oil: The price of crude was stuck in the range of $95 and $101 last week as the dollar retreated. The rally in the dollar index from the 72.60 level completely destroyed the crude markets. The price of crude fell 13.5% from it's recent peak of $115 per barrel to close at $100 last Friday.The dollar index, on the other hand, rose 3.7 percent in the same period.

The disproportionate fall of crude compared to the rise in the dollar shows that crude is relatively weaker than the greenback. Hence, if the dollar begins to rally, crude will fall more in percentage terms. Crude is thus a a good commodity to short once the dollar begins to rally. Once crude falls below $95 per barrel, it can go all the way down to $90.

he fall in silver is not surprising as it had risen dramatically and is now coming back down to its historic average. Reuters

Silver: The white metal is extremely weak compared to the dollar. In fact, it's weaker than crude. While the dollar rallied 3.7 percent and crude fell by 13.5%, silver crashed by a whopping 30%. This indicates that silver is extremely weak. The fall in silver is not surprising as it had risen dramatically and is now coming back down to its historic average. The average price of silver should ideally be in the $33 range as of now. Last Friday, white metal closed at $35.09 on the silver futures contract traded on the Chicago Mercantile Exchange.

Silver has the potential to go down to the $31.75 level and trading below that level can take prices to the $27.75 area. The price action of the dollar will show where silver goes.

Gold is much stronger than silver or crude oil as it has fallen only 4.25% as of last Friday's close. Even though the dollar fell only 3.7 percent, gold continues to be a good bet to the long side. Unlike silver, gold has moved up in a steady fashion, which is an indication that prices can continue moving up.

George Albert is based in Chicago and edits www.capturetrends.com