It seems the Fed has failed to spark a spike in commodities.
Federal Reserve Chairman Ben Bernanke strongly reiterated the value of qualitative easing in his semi-annual testimony before Congress last week. He made it clear that QE, the Fed's low interest rate policy, could continue well into the future. What makes this significant is that there has been some dissension within the Fed, and some seem to believe that the policy should end early.
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There is an interesting phenomenon going on with the world's central banks. Usually when there is an economic crisis or slowdown, it is confined to certain areas of the world. But in the latest recession, the faltering of economies was so widespread that central banks easing caused a race to devalue currencies — with the U.S. falling into last place. This, in turn, has kept our dollar relatively strong compared to the basket of major currencies in the dollar index.
The dollar index closed at $82.3 on Friday — its highest level since August of last year. And of course, with all the liquidity around the world looking for a home, it has found one in the good old U.S. dollar. The dollar is still the reserve currency of choice, and that has driven demand.
And you know what happens when you have a strong dollar? Yes — you have cheaper commodities, especially gold and crude oil. Gold has also been pressured because government statistics – emphasis on "government" — has shown inflation to be well within acceptable levels, taking away one of the main reasons for investors to put money into gold.
The trend for both gold and crude has been a downtrend.$1,530 to $1,522 in gold is an important support level to watch, and the $1,545 to $1,555 level should also not be ignored. On the upside, $1,600 and then $1,620 are the first resistance levels.
For crude, $90 dollars is downside support, and then $89 is the next level. Only a close above $94 ignites rallies to the upside. But as long as the strength in the dollar continues, the immediate future for crude and gold looks dim.
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