Decline for gold, and therefore most likely commodities, may not be over

Where are investors to turn for profits?

U.S. and global stock markets are in corrections, producing losses for investors, and they do not look like their declines have ended yet.

Investors who flocked into commodity trading over the past year are now having their heads handed to them with the sudden collapse in commodity prices.

The price of oil, which had surged up from $70 a barrel a year ago to $115 a barrel in April, with Wall Street firms calling for $150 a barrel by September, has instead plunged 20% to $92 a barrel. The CRB Index of Commodity Prices, which surged up 50% over the past year to its peak in late April, has plunged more than 10% in the two months since, hitting a new low this week and showing no signs of bottoming.

For the most part, Wall Street firms are recommending that investors take advantage of the lower prices and buy the dips. But it would seem that at least waiting for prices to stop declining, and for clear signs of an upside reversal being underway would be wiser decision.

Meanwhile, gold, the historic hedge against inflation, and pretty good forecaster of commodity prices, surged up 50%, from $1,060 an ounce 14 months ago, to $1,575 an ounce in April, but has fallen back $70 an ounce in the two months since.

And some of the remarks of hedge fund managers at their GAIM conference in Monaco last week indicate the decline for gold, and therefore most likely commodities, may not be over.

Hedge funds have been among the most aggressive buyers of gold over recent years. But a number of executives at the GAIM conference said gold and base metals are now over-priced.

The CEO of FRM Capital Advisors said “I sense they are peaking.”

Robert Marquardt, founder of hedge fund firm Signet, told Reuters he has closed down a fund he launched in 2003 that was denominated in gold, and returned the cash to its investors. He said, “Gold at $1,500 is now a speculation, no longer a store of value.”

So again, where are investors to look for the next likely profit opportunity?

I suggest the U.S. dollar.

While stocks, commodities, and gold, seem to be paying the price for having become overbought in a binge of excited bullishness by investors, the U.S. dollar is at the opposite extreme of its cycle, extremely oversold and out of favor.

Last fall, the Fed’s QE2 program began pouring $600 billion of additional dollars into the financial system through treasury-bond purchases. As a result, the dollar, which was rallying nicely last summer, reversed sharply to the downside, and two months ago was at a low not seen since the middle of 2008.

At that point, technically the dollar was oversold beneath its 30-week moving average, and the plunge had investor sentiment extremely bearish, investors convinced that the dollar was finished for good as far as being a global store of value.

And sure enough, with that indication that everyone who was so inclined had already sold the dollar, it found a bottom in May and has begun what I believe will be a sustained rally.

My work is based primarily on technical analysis of markets, and my technical indicators triggered a buy signal on the dollar on May 11. But there are also reasons in the fundamentals to expect a sustainable dollar rally.

They include that the Fed’s QE2 program of pumping excess dollars into the system has expired, and the Fed has said it has no plans to extend the program. The dollar was rallying nicely before QE2, and it’s reasonable to expect the end of QE2 will have the dollar back in rally mode.

And then there is investor sentiment, the current extreme of bearishness regarding the dollar. High levels of bullishness are usually seen at market tops, and extreme bearishness at market bottoms.

In that regard, long-time dollar bear Jim Rogers of Rogers Holding, made an interesting admission in an interview in Bloomberg Business Week last week. The interviewer was puzzled, and said, “You are the ultimate dollar bear, yet you just told me you are buying the dollar. Why is that?” To which Rogers replied, “Because everyone is bearish, including me. I read something like 97% of people are bearish on the dollar. So I bought dollars.”

But how do ordinary investors buy dollars, without getting involved in high-risk foreign currency trading (Forex), which is best left to professional trading firms?

The PowerShares DB U.S. Dollar Bullish ETF (NYSE: UUP) was established in 2007 to track with the U.S. dollar. Being an exchange-traded-fund, it trades on stock exchanges like a stock, and is available through any brokerage firm.

In the interest of full disclosure, I and my subscribers took positions in UUP at my May 11 buy signal, and still hold them, expecting a sustainable dollar rally.