COMMODITY BOOM

Despite the slight pullback for stock prices to round Friday, key indices were a good 2% to the better for the week as a whole. The price of gold closed above $1,000 per ounce and that was the first time in seven months that the precious metal had traded above that price. The huge catalyst spurring gold demand was a run on the dollar.

When the dollar falls, prices for minerals rally in response given their role as an alternative store of value. Barclays Capital last week noted that the amount of money investors poured into commodity-related products throughout August at $2.63 billion was at least twice the amount witnessed in any prior August. With the bulk of investors choosing exchange-traded products (physical futures contracts) as opposed to mutual funds or structured products, the curious theme within the Barclays' report was the fact that investors plumped for European exchange traded products rather than U.S. exchange traded products. Is this another sign that investors are increasingly wary of the dollar?

Perhaps - but some of the switch is probably due to the reaction from U.S. regulators to the bull market for commodity prices, which in part was responsible for crude oil reaching almost $150 per barrel. By clamping down no trading limits and position sizes the CFTC may have helped alienate investors to U.S. markets. Within those commodities traded on American exchanges, investors favored those least likely to be affected by further rule imposition.

One victim emerged recently after Deutsche Bank said it would close its PowerShares DB Crude Oil Double Long Exchange Traded Notes vehicle because of concerns over its position limits. Such vehicles allow investors to position in specific commodity markets without owning futures or physical products.

The price of gold screamed to an 18-month high Friday as the dollar's six-month long ease became more of a slide. As we noted last week, bond prices have climbed despite the dollar's demise and in the face of a mountain of supply from the U.S. government. Some say that the rally for gold is all about a rise in inflation fears, yet the current evidence is absolutely missing.

As ever there is no point waiting to see the evidence before taking a view and those investors diving into the debate backing their views with hard cash are assuming that the fiscal bailouts will ultimately feed through to the consumer level and so debase the dollar. The Fed argues that it can speedily withdraw much of the liquidity it has provided through a variety of as yet untested measures.

Yet for now metals prices are likely to have the added weight of a weaker dollar in their corner. Investors are reveling in the proposition that the dollar has become the world's cheapest funding currency as short-term borrowing rates (those available between banks) have slipped to an all-time low and below those of currencies such as the Swissy and the Japanese yen traditionally assumed be the lowest cost units.

With investors globally throwing in the towel on risk-aversion, the dollar's slide is likely to accelerate this week. The dollar index reached an 11-month low Friday in the longest lasting slip in some six months.

Will bond prices react too? Watch this space.

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The Supreme Council of the Secret Order of Jurojin

Tyche Research