Thursday, June 4, 2009

Dollar Saga Continues; Commodities Take a Hit

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The sell off in the market yesterday was concentrated in commodities with sharp moves down in anything related to them. Most commodities, particularly those related to oil were at important overbought levels and needed to come down to take some pressure off before they could go to higher highs. A week or even two weeks of selling was compressed into a single day. While this is frightening to look at when it is happening, it is the slow gradual declines that are far more dangerous. Sharp declines create gaps that usually have to be filled and hit support levels very quickly so buyers are encouraged to come right back in. So far many commodity stocks simply sold back to their 10-day moving averages - normal behavior in an uptrend.

The stocks of commodity producers were far more damaged that the commodities themselves. Light sweet crude, which closed at 68.45 earlier in the week, closed at 66.12 yesterday. It's intraday low was 64.95. This drop is hardly remarkable after a six day major move up. In mid-morning European trading NYMEX oil was back up to 68.17 and you would never have known anything had happened if you had been away for the day on Wednesday. Oil started selling down again when the American market opened, so we will have to see what happens.

Gold fell as low as 960, but rebounded to 975 in Euro trading. Silver fell almost to 15.00, but was as high as 15.50. Gold is hoovering under the key 1000 level and silver is trying to break its resistance at 16. Silver was as high as 16.20 in overnight trading on Tuesday. Like oil, the precious complex was selling down on the trade-weighted dollar bouncing off major support at 78.33. The dollar was 79.90 in early trading this morning. The monetary authorities seemed to be pulling out all stops to save it from falling into the abyss. It remains to be seen how long they can be successful.

Bernanke was out with commentary on the economy yesterday. The news media headlined his remarks as "Bernanke Sees No Inflation in the Near Term" (what a convenient headline when the dollar is about to breakdown because of inflation concerns - must be coincidence). For those who don't remember, Bernanke also said in June 2007 that subprime mortgages weren't a risk to the financial system. One month later the subprime crisis blew up. While Bernanke may not be worried about inflation showing up in the next few weeks, his remarks were far more pessimistic than the headlines indicated. He did acknowledge that if the U.S. doesn't get its budget deficits under control there could be significant problems in the future. Of course, Bernanke could just stop engaging in easy money policies that help support the government's spending addiction. This won't happen because Bernanke would first have to face that he was co-dependent serial inflator. Maybe the world's central bankers should form a 12-step support group?

The June meeting of the New York Investing meetup will be held tonight June 4th, 6:45PM at PS 41, 116 West 11th Street. See the website (below my name) for details.

NEXT: Monthly Employment Report and the Market's Reaction

Daryl Montgomery
Organizer,New York Investing meetup

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

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