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. "

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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."

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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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