USD rallies strongly, Gold holds up - a great deal of uncertainty

If I was to cast 2011 someway, it would be a disaster; it would be natural disasters of unprecedented magnitude, combined with a collapsing Mid-East order, the Euro in some big trouble and gold and USD rallying together.

The fact that the USD rallied from a bottom of 73 to 76 on the USDX in about a week or two, and gold holding shows how strong gold is at this level. And the rapidly escalating EU bond crisis is helping gold.

End of the world

Then, to add a bit of weirdness, Harold Camping, a Christian minister predicted the end of the world on May 21, which did not happen. I heard the media talking about this for days, CNBC, Satellite radio, etc. But the world media ate that story up. Kind of indicates to me that people are getting a little worried about what is happening on earth?

Don't say I'm being overly dramatic. The US Mid-West got hit with over 600 tornadoes, where usually we get 200 for the year. This by May. Then Joplin was destroyed. The flooding of the Missouri river said to be a century flood too.

Japan.... What a TOTAL natural disaster; earthquake plus 80 foot high tsunami, combined with a nuclear crisis of unprecedented magnitude. The middle of Japan is reeling, and they do not know how to deal with the fallout of those 6 burning reactors. Toyota and many others are cutting their production until the parts suppliers dig out. Japan GDP - 3%. The devastated areas, 100 square miles, are buried under 15 feet of rubble and radiation.

This is biblical level stuff. So, maybe Camping was right (joke).

A new Mid East for 2011

The Mid East situation is unbelievable. With half the countries in the Mid-East in either civil war, or mass protests, then add to this mix Obama pulling the rug from under the Israelis, with a call for them to return to the 1967 borders. No doubt gold has a $20 plus Mid-East fear premium.

So, not only are we getting an entire new set of political alliances in the Mid-East, but all the old treaties, you might as well rip them up, including the Egyptian peace. Israel is just about alone in the world now. If any war breaks out, you can add about $50 instantly to the price of oil. And probably $50 to gold.

The USD rally combined with the Euro problems this Summer calls into question the US markets as QE ends in June. The USD rally may be anticipating a major market correction in Summer. It also portends a cooling of the commodity rally, if not a peak of those markets.

When the Euro was about 1.45, we called a Euro peak about two weeks ago, along with a USD rally April 25, 2011. Since then most all inverse USD markets have corrected. The oil and commodity space is still alive and kicking though, but has shown some signs of correcting.

Can gold hold $1500?

So, one big question to me is will gold hold its gains to around $1500, if the USD continues rallying. Evidently, with the Euro/EU mess, gold is steady. Would gold correct much this year? It seems unlikely though a small correction can happen of course. As long as gold and the USD rally together. I mean, things are very very serious in the Mid-East and the EU both. Big time fear trade in parts of the world. The US and USD is the beneficiary for now.

China slowing, reports that China is finally slowing its bubble growth. One thing that I wonder is how bad their real estate market will crash. In Shanghai and Beijing, apartments of two bedrooms can cost $500k USD - not Yuan - dollars. That is clearly overvalued for that economy. $500k is common, not unusual there.

Many of these units are vacant and owned by speculators. Same formula for a real estate crash worldwide. They all follow.

Higher interest rates in ChIndia

India raising interest rates again, China raising, it is slowing China down a bit. There are a lot of reasons to wonder if the commodity bubble will endure without a major correction. The inflation worries (I think these are overblown a bit except in places like China and India where food inflation is 25% a year) normally translate into commodities, but I wonder if this sector after being strong for a year and a half, is due for a correction anyway. The USD rally won't help a commodity rally one bit. Gold again is an exception being a flight to safety cash component.

Anyway, we have lots more to say on gold and silver prices, as well as oil, the USD, the Euro, the Yen and so on. Our subscribers have been quite happy with our calls of late...that USD call was one lulu. Stated two weeks in advance of the bottom at 73, they got time to adjust. Most inverse USD markets corrected hard.

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Copyright 2011

Christopher Laird

Editor in Chief

Disclaimer: Chris Laird is not an investment advisor/professional. This article, and the PrudentSquirrel newsletter and alerts, are general market commentary only. They are not intended as specific advice. You should talk to your own investment professionals for specific advice. Information here is deemed reliable but should be verified by you if you think it's important.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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