Dollar Slams Commodities: 'Total Blowout' Coming?

A rising U.S. dollar is exerting major pressure on commodity prices and in turn could be setting up a prime buying opportunity in grains, energy and—yes—even gold.

Flames are seen in a field at the edge of Voronezh, central Russia, on July 31, 2010.
Alexey Sazonov | Getty Images
Flames are seen in a field at the edge of Voronezh, central Russia, on July 31, 2010.

Market pros expect the near-term direction for oil, metals and other items in the space to be downward as investors flock to the safety of fixed incomeand simultaneously drive up the greenback's value.

The dollar , as measured against a basket of its global peers, hasn't seen these levels in nearly two years as buyers run from the turmoil of Europe's sovereign debt crisis .

While there appears to be little ahead to change the momentum that has hammered risk assets — commodities among the rest — the trade is bound to get overdone.

"People are really making a mistake in looking at this cycle and saying this is just another total blowout and the commodity prices are going to get endlessly crushed," says Richard Hastings, macro and consumer strategist at Global Hunter Securities in Costa Mesa, Calif. "We really don't see that as being the case."

Oil prices are primarily on Hastings' radar screen.

U.S. light, sweet crude has gotten pummeled in the wave of global growth concerns, falling more than 18 percent in May alone and taking some of the pressure off consumers who have suffered at the gas pump. Regular gasoline has slipped 18 cents a gallon during the crude slide.

Hastings sees the selling continuing until oil reaches $75 a barrel.

"We would expect a quick rebound from that oversold level," he says. "Even at that level, the domestic production story has plenty of margin, and the demand story in the Western Hemisphere remains steady."

Derek Gates, founder of Houston-based Sustainable Wealth Management, is about to launch an exchange-traded fund based on the Canadian oil sands project (the ticker will be SNDS, for Sustainable North American Oil Sands). However, he says he is not deterred over the long haul by oil's recent plunge.

"You have weak economic growth, so it hurts everybody," he says. "It's just one of those things where you have to get out of the way."

To be sure, there is plenty of disagreement over which way commodities are headed.

Ruchir Sharma, head of emerging markets and global macro strategy at Morgan Stanley Investment Group, this week told CNBC Asia's "Squawk Box" that "this is the sunset of the big commodity supercycle," and predicted a two-decade slump in prices. "That has huge implications for many commodity-exporting countries," he said.

The Reuters/Jefferies CRB Index , which measures commodity prices, is off about 16 percent from its February peak and falling fast. Analyst Abigail Doolittle at Peak Theories Research indicates the index could fall another 5 percent or so in the near term and up to 25 percent in the longer term.

Still, that isn't deterring those looking for opportunities amid the selloff. In addition to continued signs of emerging market growth, inflation also could push prices higher.

Corn, soybeans and wheat, among other grains, are getting attention as likely beneficiaries of sustained demand.

"The grains are really going to start to shine on their own soon," says Michael W. Gurka, managing director of Spectrum Asset Management in Chicago. "If they get deeply (sold) that's where the smart money is going to come in. The commodity guys are really liking this."

Gurka particularly likes corn because of global demand both for food and in ethanol production, and recommends investors use dips as "all the reason to get longer or initiate" new positions.

"Long-term these markets are probably setting up as buying opportunities. There's very little margin of error in corn or soybeans because of tight global supplies," adds Darin Newsom, analyst at DTN in Omaha, Neb. "We came into this year really needing some good yields and good weather to get these yields and we're not really seeing that early on."

As for gold , the future looks a bit murkier.

The yellow metal is supposed to be a safe haven, a store of wealth during times of economic and stock marketturmoil. But it has failed to live up to its reputation, recently turning negative for the year at a time when gold demand might otherwise be strong.

Not to worry, though, says Michael Yoshikami, CEO and founder of Destination Wealth Management in San Francisco. Gold, he says, will be back on its feet soon.

"Gold is essentially going to be an investment that's going to win in a number of different ways," Yoshikami says. "Ultimately, investors are starting to tire of the drama related to stocks. Even though gold is being sold off for liquidity reasons now, investors are going to look at gold as one of those kinds of investments they can touch and have some degree of faith in."