Dollar Reversal: Is the commodities bubble ready to deflate?

Posted May 1, 2008

by J. Christoph Amberger

Baltimore — (TFN): Declining from an all-time low of almost $1.60 per euro in April, the dollar has risen on better-than-expected economic data. After unexpected (if only nominally) positive GDP growth in the first quarter, unexpected (if only nominally) positive job growth in April, the Commerce Department announced on May 1 that consumer spending rose a more-than-predicted 0.4 percent in March, while the Institute for Supply Management indicated that U.S. manufacturing contracted in April more slowly than anticipated.

The dollar rallied more than 1 percent against the euro, reaching $1.5461 in late trading.

None of these numbers are indicative that the economic slowdown has been overcome. But I predict that few serious economists will be using the term “recession” much for the rest of the year:

After posting positive growth in the first quarter, the earliest that an official recession can be determined at this point would be the close of the third quarter… at some point in October. And the cleverly placed flooding of consumers’ wallets with unearnead tax rebate cash will create enough of an artificial bump in the GDP numbers of Q2 and Q3 that we will be avoiding the official declaration of a recession until 2009.

Which could take some pressure off the U.S. dollar.

On Thursday, we were treated to a dress rehearsal of how the resulting domino effect could play out:

* Crude oil, which had been trading at close to $120 a barrel earlier in the week, fell briefly to near $110 a barrel and then settled at $112.52.

* Rough rice for July delivery—the stuff hunger riot fantasies are made off since a California Costco limited purchases to members—fell $1.145, or 5.3 percent, to $20.635 per 100 pounds.

* Gold fell as low as $847.10 an ounce, the lowest level for a most-active contract since Jan. 2, and down from a March high of over $1,000 per ounce. Silver and palladium also hit three-month lows as platinum shed 3% to a one-month low below $1,850 an ounce.

Some pundits see the next stop at the 200-day moving average, currently at $822 before the correction will be complete.

A timely reminder that gold and oil are what they always have been: Highly speculative commodities whose prices are moved by the global interdepencies of supply and demand, and the rational and irrational expectations investors have on currencies and economies.

The only way to profit from the ongoing bubble is to remain conscious that, eventually, all bubbles pop. And that the only safe profits are profits you took when the going was good.

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