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Demand’s Not Killing Commodities — The Dollar Reversal Is

Fin - Breakout - US

For those tied to the headline drops in silver, gold and crude, please note that smart, or at least professional, money has an eye on the U.S. dollar.

"Crude Demand Falling" is a nice headline, but is simply false, to be kind.

From where I'm sitting, and after discussions with brainy traders like Jon Najarian (we'll have clips up soon from our talk), the reversal of the dollar is the dog to the commodities' tail. When the dollar moves higher, as it is today, particularly against the euro, it takes fewer dollars to purchase commodities. So when you take your dollar to buy a brick of gold or silver or a barrel of crude, you don't need as many as you did yesterday.

Thus, the price of crude drops and the moves lower in gold, and even more so in silver, go from aggressive to panicked. As of this writing, crude is down 6.5% to $102.19. Heating oil and natural gas are slumping 6%. Gold is off 2.3% at $1,480.30 an ounce, and silver is sliding another 7.5% to $36.42. In other words, an ugly day for the commodities.

On an institutional level, the short-dollar trade has been as crowded as silver and gold were among retail investors. As long as the dollar moves higher against other currencies, there will be no sustainable reversal in crude or commodities.

It takes two sides to make a market, so readers are, as always, free to disagree, but from my view, "buying the dip" on commodities is a sucker play until the moment if/when the dollar slide resumes.