A Warning for U.S. Dollar Bears and Commodity Bulls

Includes: DBA, DBC, GDX, GLD, XLE
by: Cam Hui, CFA

As the cacophony of voices calling for doom for the US Dollar (and conversely a rise in commodity prices) come to a crescendo (example here) and gold tops $1,000/oz. and oil tops $110/bbl, I would like to reiterate my word of short term warning for the Dollar bears and commodity bulls. Signs of a speculative blow-off are everywhere.

Sentiment is getting a little extreme for this trade to continue too much further in the short term. Recently Bob Moriarty of 321gold.com sounded a note of caution (italics are mine):

Nothing goes straight up and nothing goes straight down. As edifying as it is to see silver and gold go up almost every day, now and again all markets take a breather.

I run a gold site and it's considered heresy to suggest commodities correct but they do. Even the lowly dollar goes in the opposite direction on occasions.

Ten days later, he hedged his earlier comment and conceded the bullish case for gold based on an apocalyptic scenario for the US economy and Dollar:

It's a time for caution. We SHOULD have a violent correction in gold and silver and the dollar based on emotion and government intervention but we could see $3,000 gold in a week or the start of a living nightmare brought to you by the Gang of Fools in Washington. No one knows.

To me, that was the first sign of a speculative blow-off in the USD and commodities. The second sign: Both Energy and Gold stocks are at or near the top of their relative uptrend channels against the S&P 500. Can they go higher? Yes. However, the relative downside risk in the near term appears to outweigh the upside rewards.

The third sign of excessive bullishness: The Commitment of Traders chart from CFTC data of large speculators in gold show that they are in a crowded long position, which is contrarian bearish:

My inner trader says that we are in the final stages of a speculative blow-off in commodities and has the potential to correct violently. My inner investor agrees with the consensus view, however, that we are in a long multi-year decline of the US Dollar and multi-year rise for commodities.