A major rally in gold, oil, silver and other commodities is under way. But it’s not for the reason you might think.
European leaders have decided to go to the bailout well yet again, this time using reserve funds to recapitalize struggling banks in Italy and Spain. The announcement has done wonders for the market, sending U.S. stocks up more than 2% in Friday morning trading.
Commodities are on quite a run, too. But that has nothing to do with the latest euro bailout.
The euro is going to crash spectacularly. That’s despite re-shuffling the deck chairs for the 20th time in as many months.
And while the global market seems convinced for this one hot minute that things are "better" in the euro zone, they're still not "all better."
So you might be tempted to look at commodities soaring on the heels of this non-agreement, and think that it’s because the market actually believes this time.
But in actuality, this short-term non-solution in Europe hasn't affected the supply and demand of commodities. How could it?
So why did oil pop 4.4% in the past 24 hours? Why is gold up $50 an ounce? Why did copper jump 5%?
I’ve mentioned this many times before – but this short-term move is all about dollar weakness.
Check out this chart of the U.S. dollar over the past 24 hours:
If it holds up, the 1.5% decline would be the largest one-day decline in the dollar this month – by a fairly wide margin. Hence, commodities – which almost always move in the opposite direction of the dollar – are having their biggest day in weeks.
We should expect more of the same in the coming months. The data has not been good lately for the U.S. economy.
Unemployment ticked up last month for the first time in a year. Most of the major U.S. banks had their debt ratings downgraded last week. Ben Bernanke and the Fed seem unwilling to do anything to stimulate the sluggish economy besides the occasional “Twist.”
All the signs of another recession are rearing their ugly heads again. And now the slowing U.S. economy is starting to catch up to the dollar.
Today’s pullback in the dollar could be just the beginning – which means the rally for gold, silver and oil is just getting started. Look for more days like today – with big declines in the U.S. dollar spawning huge gains in commodities.
A few more days like today, and the commodities rally we’ve been forecasting for months will be in full effect.