Trading with Intermarket Analysis

CHAPTER 5

The 2002 Falling Dollar Boosts Commodities

This chapter deals with the major peak in the U.S. dollar during 2002, which led to a major uptrend in commodity markets. Gold experienced a major upside breakout as the dollar broke a seven-year support line. Gold ended a 20-year secular bear market just as stocks ended their secular bull market. Commodities outperformed stocks for the first time in two decades. A peak in crude oil during March 2003 contributed to the stock market upturn.

■ Commodities Inflate

The previous chapter mentioned the Fed’s sudden concern about deflation in May 2003 and the U.S. government’s abandonment of its strong dollar policy. The plan was to sacrifice the dollar in an attempt to boost prices. By the time the Fed became concerned that prices were falling, commodity markets had already been rallying for over a year. A lot of that had to do with the falling dollar.

The U.S. dollar hit its final peak during the first quarter of 2002. From that point, it dropped sharply for the balance of that year and for the rest of the decade. The CRB Index (a basket of commodity markets) turned up at the exact point that the dollar peaked. For the rest of 2002, commodity prices continued an uninterrupted advance (which was also to last for several years). That action was consistent with the intermarket principle that a falling dollar usually results in higher commodity prices. That’s just what it did during 2002.

JOHN’S TIPS

The complete name for the CRB Index ...