The persistent decline in the price of oil from mid-year until now has caught many by surprise. Many market observers thought there was a $100 floor under Brent crude based on technical and fundamental supply-demand factors. After quickly breaking through that level, traders began speculating on unknown geopolitical explanations, as recently discussed in “Oil Wars.”
Causal explanations aside, notice the near mirror-image relationship between oil and the U.S. dollar. As the dollar has rallied, oil has fallen in almost perfect tandem.
This same is true of commodities. Here, the inverse relationship is even stronger.
Given the above, it is clear why many traders and strategists have tried to justify large positions in gold or other commodities on fears over a dollar crash. So far we have seen the opposite take place.
We should note that the strong inverse relationship between the dollar and most commodities is not fixed—it changes in strength over time; however, as I showed previously with gold (see here), deviations from this dominating relationship are often temporary. Thus, if the dollar continues to climb, expect more of the same. Counter-trend rallies should be expected, but, again, may only be temporary until we see a sustained reversal of the dollar's upward trend.
For a much more detailed analysis of the main factors driving the dollar higher, you may enjoy reading "The Perfect (Dollar) Storm – When Currencies Collide" by my colleague Chris Puplava.
