Rising Crude Oil Is Driving the Dollar Down

Includes: GLD, OIL, SLV, UDN, USO, UUP
by: The Silver Analyst

There are two driving seasons in America now and they both involve oil. We are currently in the midst of the traditional driving season where Americans take to their vehicles for two weeks or more to get away from the stresses and strains of life. The second season is not so familiar but comes around now and again. It has been speeding along the interstate for 5 years now and it is the dollar-driving season. However, during this season, the driving is all downhill.

Why does this dismal season involve oil? As any gold and dollar watcher will know, the US Dollar index has been flirting with its long-term support level of 80 again. samson and delilaSome think it will hold as in former times. Like Samson in the Bible the dollar bulls will rise up and say, “I will go out as at other times before, and shake myself.” But they wist not that they have received a nasty little trade deficit haircut and they will get their collective eyes put out.

But who will be the Delilah that gets the better of the Samson Dollar? The answer in part is crude oil. For example, the monthly US trade deficit in May rose 2.3% to $60 billion. Of the $192 billion dollars of imports that fuelled this, the continuing rise in the price of oil constituted $19 billion of this or just over 10%.

To put it bluntly like George Bush, America is addicted to oil. With 5% of the world’s population, the United States consumes 25% of all global oil production. No nation is so dependent on oil like the USA. If there is one thing that will ensure the US Dollar will plunge below its long-term support level, it will be oil. Only two things need to happen to ensure this. The first is continued demand for this product that America so craves. The second is for the price to keep on rising. Take a look at this long-term chart of the US Dollar Index (black) and the price of crude oil (red).

dollar and oil

The dollar and oil tend to move in opposite directions. This is partly to be expected if the price of oil is in US dollars. If dollars depreciate then commodities priced in dollars will tend to rise. However, that doesn’t begin to explain it all. The dollar has dropped 33% in value since 2002 but oil has not increased by 33%, but rather has almost quadrupled in price as oil gets more expensive to extract and China leads explosive Asian demand.

So, the first condition that Americans will continue to demand oil looks like a certainty with demand up in 2006 and so far in 2007. But will the price of oil continue to rise? The chart suggests we are in for one more surge in oil prices before an extended break. Elliott Wave analysis draws out a nice dollar bull impulse wave that began at $11 in 1998. We are now in the final wave 5 which will be confirmed when crude oil breaks above its previous high of $78 a year ago. Western Texas crude oil closed at $78.18 this Tuesday.

We expect crude oil to test if not break $100 to trigger panic buying of gold and silver in a final blow off that will do very well for holders of these timeless stores of real value.

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