BlackRock's Russ Koesterich explains why the S&P 500 will continue to trade sideways until the economy and earnings picture improve.» Read More
Gold bugs are zeroing in on $1,370. And with good reason: That will be the critical level for the metal in this week's trading.
Gold showed tremendous strength late in the day on Tuesday and into New York's CMX floor close, pressing the market through new highs and reaching $1,348.70. The rally also coincided with a lower-than-expected yield in a two-year auction, which also provided support to the treasury market, and signaled a move toward safety.
(Read more: Why Detroit is good for gold: Ron Paul)
The Detroit bankruptcy has been called an American tragedy, and one of the most heart-wrenching financial stories of our time. But according to Ron Paul, America's biggest-ever municipal bankruptcy could actually give gold bulls something to cheer about.
For Paul, the Detroit bankruptcy is the first of many municipal bankruptcies to come, and could even foretell what will happen to the United States as a whole.
"Long term, you can expect governments not to change," said Paul, who predicts that the U.S. will print more and more money as it continues to take on debt.
(Read More: How your city might pay for Detroit's money mess)
"We're going to see more Detroits, and eventually the government of the United States will be somewhat similar to Detroit, because people will give up their confidence in us, they'll give up confidence in the dollar, and eventually they'll give up confidence in our military. And then you'll see some real, real changes in this system, which has been built on a fiat dollar for the last 40 years," the former U.S. representative said on Tuesday's "Futures Now."
Why does this matter to gold? Because Paul expects to see gold skyrocket as the dollar crumbles. As he said on June 16: "As long as we have excessive spending and excessive computerized money, you're going to see gold go up. And eventually, if we're not careful, it could go to infinity, because the dollar will collapse totally."
The point is that as each dollar loses value, it takes more of those dollars to buy an ounce of gold, so the dollar value of gold rises. If people stopped accepting dollars, then no number of dollars could purchase an ounce a gold, making the gold price "infinity."
(Read more: Ron Paul: Gold could go to 'infinity')
Will the crude rally derail the economic recovery? Many traders have asked themselves that question, as crude is trading $10 higher than it was just a month ago.
The answer, however, depends how long oil stays at these levels. If oil remains at these levels for the remainder of the year, then yes, it will have a negative impact. But with that being said, I don't expect us to remain this high for too much longer.
The fundamentals of this market, in my opinion, don't justify $107 oil. We are very near record supplies in Cushing, and the demand for crude, while higher than it was, is nowhere near the levels we saw just a few years ago.
And as new technology and new efficiencies are implemented, crude demand should not increase in any substantial way. We are only a few weeks from the end of driving season, which means that one of the main drivers of crude is about to be removed.
Gold bulls breathed a sign of relief on Monday, as gold enjoyed the best day in three months. After dipping below $1,180 in late June, gold recovered everything it had lost in the past month.
Gold is rising Monday, as weak shorts cover above $1,300.
After closing on Friday with its second weekly gain in a row, gold was able to begin this week with a bounce, running stops above $1,300 and trading up to the next major resistance with a high of $1,322.90. This high is against the initial April 16 low of $1,323, which is a major retracement level.
Gasoline futures have been an incredible run, rising 14 percent in three weeks. In fact, on Friday, RBOB gas futures hit a four-month high.
Traders blame the spike on supply and refinery issues. The gasoline rally has come alongside a similar move in crude oil, which hit a fresh 16-month high on Friday.
(Read more: Crude reality: Oil could crimp rally)
The rise in gasoline futures is already affecting prices at the pump. Gas prices have risen an average of 15 cents in the past week, up to a national average of $3.65 a gallon, according to the AAA Fuel Gauge Report.
Crude continues its runup, reaching for $110 in Friday's session as the impending expiration of the August contract, a short squeeze and the desire to cover shorts into the weekend are adding fuel to the fire.
The path of least resistance remains higher, as Wednesday's option expiration allowed volatility—and bullish volatility, at that—to slip back into the market. The high on Thursday was $108.43, and the market experienced a quiet overnight session.
As we head into the weekend, I would not expect to see a switch in direction, and it is more likely that we will see a run at the $110 level. With economic conditions stable, demand worries on the back burner, and crude stockpiles at the lowest level since January, traders have had no reason to sell oil this week.
(Read more: Crude reality: Oil could crimp rally)
A stronger U.S. dollar may sound like a good thing, but it's providing a serious headwind to earnings. And the situation could get worse.
"We're seeing a lot of high-level names already report the effect of a strong dollar," said Kathy Lien, BK Asset Management managing director. "We've got Coca-Cola saying that, and Johnson & Johnson. IBM said revenues were down 3 percent, but would only be down 1 percent if it weren't for currency effects."
Indeed, on Coca-Cola's Tuesday's earnings call, CFO Gary Fayard noted: "On a comparable basis, the impact of currency was a 3 percent headwind on this quarter's operating income results." And Fayard foresees that headwind growing stronger. "We expect currencies to be a 4 percent headwind on our operating income for the third quarter and full year," he said.
The Dollar Index, which tracks the value of the U.S. dollar relative to a basket of other currencies, has appreciated over 4 percent this year. This poses a problem to multinational companies because it means that the foreign currency they receive is worth less when converted back into dollars. For instance, when a dollar could buy 87 yen at the beginning of the year, someone paying 100 yen for a can of Coke is effectively paying $1.15. But with the dollar/yen trading at 100, that same person is effectively paying only $1.
It's a crude reality for the market: Oil will put an end to the rally. At least, that's what some market participants contend.
"The increase in the WTI oil price is creating too strong a headwind for growth and further equity gains," Encima Global President David Malpass wrote on Wednesday. "We think there will be a pause or retracement in equities until growth prospects improve or oil falls."
Over the course of three weeks, oil has rallied 12 percent to the highest level since March 2012, and Malpass believes that rising oil prices could pose a problem both for consumers and for businesses.
"It's an important cost of doing business, and may undercut profits and business confidence. From the standpoint of the consumer, it acts as a tax increase, reducing the income that could be spent elsewhere," he said.
One of the reasons Malpass is so concerned about the oil rally is the reason behind it.
"Expensive oil brings new negatives," Malpass said, and "this is particularly true when the increase in oil prices is caused more by supply concerns than an increase in demand."
(Read more: Here's when high oil prices could really pinch)
The API numbers showed a build of 2.6 million barrels, and the EIA number that was released on Wednesday morning showed an even bigger build of 3.1 million barrels. So if we are showing a build in supply, why the strength?
There are a few factors—and while each is small, when put together, they spell out near-term supply problems for gasoline.
Refiners have had a few snags in getting supply out, with maintenance issues, unplanned shutdowns and problems with pipelines being the most visible. That is coupled with an increase in demand, which is because of the driving season and a slowly improving economy. Put this together, and the supply and demand picture is giving us a recipe for higher prices.
(Read more: Gasoline at the pump still rising but peak in sight)
The good news is that in a few weeks, the market will realize that we will have enough supply to meet demand, just as the summer driving season is winding down. This will cool off the market, but the wild card after that will be hurricane season.
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