A Rising Tide Lifts All Boats

This is my post of 13th Nov. "The rally from March has been underpinned by a fall in Dollar against most currencies. This fall in the dollar-or a rise in other currencies has resulted in a rally in all commodities. Therefore the statement in the title of the note.

While we can safely suggest that the falling Dollar has resulted in a increase in value of all commodities, I wanted to check whether there is anything that can be learnt from the relative gains in different commodities. Specifically I wanted to check the value of Industrial metals vs Precious metals. The logic being that while both could rally because of the dollar, if the economy was actually doing well then the Industrial Metals should outperform the Precious Metals because there would be a real demand for the same and not just a boost from the falling Dollar.

So we look at a chart of the ratio of Copper vs Gold. While both commodities had rallied until June-July 2008, we see that the ratio had topped out in 2006 itself. Since then the ratio has been in a secular bear trend and the last bottom was in March 2009. Since then the rally in the ratio has taken it up but not past any previous pivot tops. In the last couple of months we actually see a dip again which could be the start of another round of fall in the ratio. If this is true and this is a BIG IF, then the best asset class to own at the moment could be precious metals and not equities or industrial commodities. Even a rally in the Dollar could lead to a lot less of a destruction in the value of gold compared to the destruction in value of other asset classes.

So much for all this. The real question is whether the 0.8% rally in the Dollar Index indicates that the Dollar has bottomed out. We have seen this kind of indication in the past too only for the Dollar to fall back again into the downtrend. But the Dollar carry trade is a very crowded trade and therefore my belief is that we are on the verge of a sharp vertical rally that could take the Dollar to almost 80 in the coming weeks. If this is true then we could be in for some interesting times in equities and commodities.