Written for Business Standard
November 30, 2011: The continued sell off in the Dollar is key to a rally in precious metals and commodities. The dollar index hit a reversal point on Friday and sold off on Sunday and Monday giving a boost to commodities.

The greenback and commodities generally have an inverse relationship as most basic resources are invoiced in dollars. So when the value of the dollar falls that of commodities rise. Last Saturday we had published an article predicting the sell off in the dollar and the consequent rise in risk assets such as equities, the Indian Rupee and commodities. That's exactly what happened when the currency markets opened on Sunday. 

However for the risk party to continue the sell off in the dollar index must be sustained.  The dollar index, which measures the greenback against six major currencies reached a level of resistance between 79.50 and 79.90 on Friday that led to the sell off. The dollar index could go all the way down to the 78 level which will lead to broad based commodity rally and also a strengthening of the Indian Rupee.

However, before the commodity, equity and Rupee bulls rejoice we should add a note of caution. Even though the Dollar index has sold off it still has to produce a sell signal on the indicator--commodity channel index (CCI). At the time of writing the article the CCI was above positive 100. When the CCI goes above positive 100 and then falls below it, chartists treat it as a sell signal. Also the CCI continues to make higher lows, which is still bullish. So it's possible that the sell off in the dollar index was just a small correction and that the rally could continue. But since the index is coming off a strong reversal point marked on the Dollar Chart, we would be bearish on the greenback unless it closes above 80.

The Rupee bottomed out on November 22 and has since begun rising. It continued to rise despite the rise in the dollar index. Since the dollar index moves inversely to the Indian currency a rise in the rupee showed its relative strength to the greenback. In fact the Rupee rallied against  major currencies such as British Pound, Euro, Swiss Franc, Yen and Australian dollar. In case the Dollar stops falling and closes above the 80 level it will be bad news for the Rupee.

In a bear market scenario for the Dollar, the first target for the Rupee is 50 range followed by 49.

Gold and silver have been range bound despite the rally in the dollar signalling that the precious metals carry relative strength against the dollar. Gold however faces resistance between $1720 and $1740 per troy ounce. If the yellow metal is able to clear that level it can rally all the way up to 1760 before it faces resistance. Gold was trading at $1711 at the time of writing this article. Silver faces several resistance levels on the way up at $32.19. $32.50. $33.04 and $33.67. Silver was trading at 31.89 at the time of writing this article. Given an option between gold and silver, the yellow metal faces less hurdles to the upside and is a better bet for bulls. The key to both metals taking off depends on the strength of the greenback's fall.

Copper right now is in the middle of a trend and away from key support or resistance levels. A fall in the greenback can take copper to its nearest resistance level of $3.50 per pound after which the next resistance level is $3.74. However a stronger dollar can take the price of the metal down to $3 per pound. Copper was trading at 3.35 at the time of writing this article

Crude oil recently sold off from a strong level of resistance. The fall in the dollar can take it higher, but we doubt that crude has much upside left as it had rallied substantially for the past few days.  Crude faces resistance in the $120 to $103.5 level. It was trading at $97.75 at the time of writing this article. We'd prefer to play with either gold or copper to benefit from a commodity rally.