It has become standard thinking among the economic establishment since the run-up in crude oil to the $135-$140 level that commodity prices have to be brought under control.

• A survey of recent actions by world central banks shows a uniform trend toward tightening.
• The Wall Street Journal and The Economist are writing hard-hitting pieces in favor of a strong (U.S.) dollar and are expressing outrage and indignation about the high energy prices.
• Even helicopter Ben Bernanke has been forced into line and been made to give at least lip service to the concept of a stronger dollar.
• There is a sharp decline in sales of new cars in the U.S., and most of those sold are the extreme economy cars.  Many Americans have already switched to taking the bus.  There is a word for this which may not be understood by members of the economic establishment.  The word is poor.

Given these facts it might be reasonable to assume at least a mild pause in the powerful commodity bull market which started in August 2007 and continued into the early part of this year.  After all, the dollar has been in a rally (of sorts), gold has been in a funk since mid-March, and one does not easily fight the establishment – not for the short term.

What then do we make of the fact that the CRB index broke out of a symmetric triangle formation to a new all-time high (see below).

A symmetrical triangle is a very well- behaved chart pattern and is discussed in Technical Analysis of Stock Charts by Edwards and Magee.  It tips us off to its final direction even before it breaks out because it is a continuation formation and usually breaks out in the same direction it was traveling before entering the formation (in this case up).

Further, the big establishment effort has come in the form of an attack on crude.  Saudi Arabia increased its output of barrels per day to 10 million.  It was a calculated move to put crude down.  And crude went down – for one day.  The next day saw a strong rebound.  Then China stepped in with a price increase measure.  It had the same one-day result.  Now the Saudis are going to try again.

What do we call this when powerful political interests try to make something happen, and the market does not let it happen?  We have to say that the market is reflecting a much more powerful supply/demand situation then had been recognized.

The past 3 months have seen a weak rally in the U.S. dollar index.  During this time we have seen a rally in the 4 energy commodities, in corn and soybeans and in cocoa.  The meats have not moved.  However, a big rise in the grains makes it expensive for farmers to feed their animals.  They send the animals to slaughter, and this causes a decline in price for the short term.  In the long run, a rise in grains will cause a rise in meats.  But the current action of the meats tells us that we are still early in the move.

This dollar rally is being caused by a basic belief in the establishment.  People say, “Well, Bernanke is concerned about the dollar.  The President, Congress, they have to do something about the rise in prices.”  Of course, the President and Congress have done something about the rise in prices.  They have run enormous budget deficits and caused the rise.  Looking to them to solve the problem is like hiring the wolf to guard the sheep.

On top of this, Friday’s Commitment of Traders data (for Tues. 6-17-08) was a shocker and is giving us good information about the future direction of the dollar (and by implication commodities).  It will be discussed in the 6-27-08 issue of the One-handed Economist.

This is the kind of analysis you will find at the One-handed Economist, an 8 page, fortnightly newsletter which analyses and predicts the financial markets..  Social and political analysis is available (at no charge) on www.thegoldbug.net.  Subscriptions to the One-handed Economist are available (via the website) for $300 per year.  You are invited to check us out.

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