Dear Friends,

Index fund activity across the commodity spectrum is intensifying with huge sums of money pouring back into the rather small world of commodities. Current fundamentals in many of these markets do not justify moves of the extent that are occurring as this tidal wave of hot money overwhelms commercial hedge selling. Nonetheless, the “reflation trade” with the US Dollar on the short end of the stick as carry traders relentlessly beat it down to exchange these borrowed funds for things tangible is lifting the commodity boat across the board with few exceptions.

This is being reflected in the Continuous Commodity Index which is the one that I track to keep tabs on this sector as a whole.

If you observe the chart (weekly) it has almost recaptured 50% of its losses that began back in July of 2008 when the bubble burst and the Yen carry trade was unwound and the extensive deleveraging trade began with a passion. The level near 470 marks that halfway point. If, and this is what we are watching carefully, the CCI takes out that level for two weeks and sustains it, that which we have long feared in regards to the collapse of the Dollar will be confirmed, namely, that the wave of inflation is underway and entrenching itself.

The monetary authorities cannot support the Dollar without sending interest rates higher and sending the floundering economy into the rocks. They might try talking it up by threatening to withdraw the excess liquidity but just try imagining what would happen to the real estate market if anyone took such talk seriously.

I have long suspected that the US would fully commit itself to the same path as Japan did when its real estate bubble crashed and that was a policy of benign neglect of their currency; only in the case of the Japanese, it was a transparent and deliberate policy of weakening the Yen. The US wants, nay, it needs the Dollar lower to keep its export market alive and more importantly, to reduce its debt payments in real terms.

The truth is that the US monetary authorities will only attempt to PREVENT A COLLAPSE in the Dollar and that is why they will venture out from time to time to remind us how a strong dollar is in the US interest and that they have all the tools are their disposal to withdraw the excess liquidity when they see the economy is on the mend. Both statements are BS.

Gold is on to this game and that is why it is reacting as strongly higher as it has been. There are now two things that I am watching to see when it moves to $1,100 as a minimum – one is a downside breach of 76 on the USDX that cannot climb back above that level and the other is a move above this 470 level on the CCI.

Click chart to enlarge in PDF format