| Dollar and Bonds:
From the March update:
"ECB and Bank
of Canada raised rates in March, yet they still trail a
full 2% behind the dollar short- rates. The dollar is anxiously
waiting for Bernanke's decision on March 28. A hold on rate
hikes will cause an immediate dollar plunge, a hike with
measured language might mean more backing and filling in
currencies and precious metals market. Euro is approaching
the moment of truth. Dollar and Euro are running out of
room to move around current levels.
Long bonds are on the verge of breaking
down, Bank of Japan has signaled desire to start raising
rates from 0%. While I don't have great confidence of a
bonds breakdown (the fed has unlimited papers to buy bonds),
such breakdown will however signal the beginning of inflationary
era. The question is how much of this is priced into commodities?"
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Mr. Bernanke and the Fed raised short term
rates by 0.25% to 4.75% last week and since then the dollar
dropped 2% against the Euro. Oil raced back up above $65.
This is perhaps the most bearish development for the dollar,
as the market is telling Mr. Bernanke to accelerate the
pace and scale of the interest rate hike campaign. Given
the ECB has more room to move up rates and that the Euro
had just broken out of a 2-year+ consolidation, we heavily
favor the Euro and gold over the dollar and predict a dollar
breakdown from the head-and-shoulder pattern shortly.
US long bonds are sitting on major support,
we are short term neutral on long bonds and somewhat expect
a rebound before the support is eventually breached.
Gold and Silver:
This is from the March update
"As noted before, I dont see gold
breaching $540 . A breakout above $570 will signal a major
move up (50%+) by the XAU. The longer gold consolidates
here, the more fuel there is for the coming rise. Silver
hasn't looked back after taking out $8. People attribute
the rise to (potential) ETF, (potential) Mexican miner's
strike. Just like the sun rises in the morning and sets
in the evening, the prime time for silver is simply due.
The shorts are edgy and staring at a chart that tells them
to cover at once."
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Gold has now broken through $570/oz and creates
a low-risk entry point. This again signals Mr. Bernanke
is behind the curve in curbing inflation. Silver price has
nearly doubled since last September. The support for silver
is at $10/oz. A retest of Jan-2005 support for the dollar
at 81 would mean a gold price of $650+ possibly before the
summer ends.
XAU
From the March Update
"We are seeing the best entry points
with gold producers. Gold broke out the historic $500 resistance
and is consolidating for another assault. Gold equity broke
out emphatically in Nov 2005 and some of the producers have
come all the way back to retest support. "
---------
We called the XAU bottom in the March update
and now predict the XAU to establish a new high of over
200 this year.
S&P500, Nikkei,
Shanghai and CRB
We wrote from the March update:
"Asian markets are taking a rest.
It remains to be seen how the world takes on the inflationary
era and rising rates. There will be abrupt hiccups but the
trends for equity markets are invariably up."
------
Nikkei has since then broken through resistance
and establish a new 52-week high. Shanghai has just broken
through heavy long-term resistance and is looking very bullish.
The CRB's uptrend is intact, which is reassuring for gold
investors. The global inflaionary pressure continues.
Conclusion:
Would the Fed continue to raise rates in
the short term to curb soaring commodity prices that defy
the expectations of those traditional Wall-Street analysts?
Regardless we expect the dollar to retest its all time low
of 81 this year. Gold has overcome the $570/oz resistance
on its way to $650/oz this year. Gold producers present
a great entry point.
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