Gold and commodities wait on the dollar

By Colin Twiggs

October 11th, 2012 1:00 a.m. ET (4:00 p:m AET)

These extracts from my trading diary are for educational purposes and should not be interpreted as investment or trading advice. Full terms and conditions can be found at Terms of Use.

The Dollar Index rally recovered and is headed for a test of resistance at 81.00/81.50. Respect of resistance would confirm the primary down-trend. Reversal of 63-day Twiggs Momentum below zero also signals a primary down-trend; a peak below zero would strengthen the signal.

* Target calculation: 81 - ( 84 - 81 ) = 78

Gold and commodities await clear direction from the dollar which in turn is dependent on the inflation outlook. Spot Gold encountered strong resistance at $1800 per ounce*. A 63-day Twiggs Momentum trough above zero would signal a primary up-trend, while breakout above $1800 would confirm. Reversal below $1740 is unlikely but would warn of another correction.

* Target calculation: 1650 + ( 1650 - 1500 ) = 1800

The RJ-CRB Commodities Index has been de-listed so I am now using the DJ-UBS Commodity Index, which retraced to test support at 145/146. Respect would indicate another test of resistance at 150/152 — as suggested by recovery of 63-day Twiggs Momentum above zero — while failure would warn of another test of primary support at 125.

Brent Crude rallied off support at $108 per barrel and is headed for another test of $117. Breakout would advance to the 2012 high of $125/$126. The small 63-day Twiggs Momentum trough above zero suggests a primary up-trend.

* Target calculation: 117 + ( 117 - 108 ) = 126

Fed Governor Daniel Tarullo Calls for Cap on Bank Size

Today's report by VICTORIA MCGRANE and ALAN ZIBEL in WSJ Online indicates Fed governor Daniel Tarullo is calling for a size limit to be imposed on major banks by way of restrictions on non-deposit liabilities.

"In a Philadelphia speech, Fed governor Daniel Tarullo recommended curbing banks' growth by putting a limit on their nondeposit liabilities, which are sources of funding for operations that go beyond consumer deposits. The idea takes direct aim at the biggest U.S. banks, including J.P. Morgan Chase & Co., Bank of America Corp., Goldman Sachs and Citigroup Inc., all of which rely heavily on such funding. Firms outside of this tier make much greater use of regular deposits...."

Rather than placing a fixed size limit on too-big-to-fail banks, it may be more effective to raise capital adequacy ratios and/or leverage ratios for banks above a certain size — to discourage further growth. There are some advantages, such as economies of scale, which may justify retaining large-scale mega-banks but we need to guard against systemic risk. Rather than setting a size limit, higher capital and leverage ratios would ensure that large banks are well capitalized in order to withstand systemic shocks.

Capital ratios compare share capital to risk-weighted assets, while (Basel III) leverage ratios compare share capital to total exposure — including off-balance sheet assets and derivatives.

More....

US: Double top threatened

Failing History - By Amy Zegart | Foreign Policy]

Iran Lawmakers Press Ahmadinejad on Economy - WSJ.com

Australia: ASX 200 breakout

Asia: China, India and Japan

I hope we once again have reminded people that man is not free unless government is limited. There's a clear cause and effect here that is as neat and predictable as a law of physics: As government expands, liberty contracts.

~ Ronald Reagan