Commodities Look to Be Going Yet Higher

Industrial commodities are firming nicely up this week despite the strengthening U.S. dollar. This resilience points out why their nascent bull markets haven't ended and the entire group is likely to move higher in coming months. In fact, these complex financial instruments are set to outperform the equity markets in 2010, and perhaps even longer.

The metals and energy futures headed lower when the euro/dollar currency pair failed to trade over resistance at 1.50 on Oct. 25. The lockstep trade among the dollar, equities and commodities kicked in with a vengeance at that turn, dropping the S&P 500 index and Nasdaq averages more than 6% in just six sessions.

Although the EUR/USD pair continues to grind lower, it hasn't broken the seven-month uptrend and will likely bounce at or above 1.45 (it's trading around 1.48 ahead of the Fed). In turn, this should set up a test of the rally highs, perhaps in the next few weeks. Meanwhile, the industrial commodity futures have decoupled from dollar strength and are testing their 2009 highs.

Gold Futures -- Daily eSignal

Let me qualify my opening comment -- not all commodities sold off with the strengthening dollar. Gold futures bucked the trend, holding close to the historic highs struck when it broke out in October and then rallying to a new high on Tuesday. This is obviously very bullish; it indicates the yellow metal is comfortable with the $1,000 level and is ready to head for even higher ground.

I predicted a long-term gold rally to $1,800 in a video interview on TheStreet.com last month and am sticking with that number. We're dealing with a multiyear breakout in an emotional instrument that's well known for extreme movement. In addition, the supporting fundamentals created by the post-crash stimulus will keep a floor under the metal well into the next decade.