Dollar Rallies, Rates Skyrocket as JP Morgan Issues Buy Alert on Metals

The U.S. dollar continues to rally as bond yields rise sharply – creating major headwinds in the gold and silver markets.

The Federal Reserve's threat of "tapering" its monetary stimulus weighs heavily on the minds of traders. Other positive economic news, including last Friday's better-than-expected jobs report, seemingly supports the current theory that the Fed will slow down its money printing.

But here's the reality: Actual workforce participation rates remain near multi-decade lows. Only 47% of Americans today have a full-time job.

Federal Reserve officials have no answer as to how this supposed economic recovery can persist as interest rates spike – especially mortgage rates. Rates on 30-year fixed mortgages have risen almost 30% since April! Higher borrowing costs will eventually put the brakes on the recovering real estate market (at a minimum).

And, if the Fed indeed cuts back on its $85 billion in monthly bond purchases, who will be willing to replace the Fed as the buyer of 80% of all new government debt? We don't see many buyers lining up.

Precious metals investors should keep a close eye on the bond markets. Yields on 10-year bonds have risen at the fastest rate in more than 50 years. Nothing is more likely to force the Fed to recommit to bond purchases than sharp increases in interest rates, which the economy cannot easily withstand.

Have the Big Commercial Banks Closed Out Their Concentrated Short Positions?

Here's a major indicator that the precious metals correction is close to ending…

JPMorgan Chase and other bullion banks appear to have taken profits on their notorious short positions and have now taken positions on the long side of the precious metals market. There was no Commitment of Traders report last week because of the July 4th holiday, but investors will be looking carefully at this week's report for confirmation.

Meanwhile, JPMorgan has just made its first recommendation to "overweight" commodities investments (including the precious metals) since September 2010. In the eight months following the 2010 pronouncement, precious metals, led by silver, began a climb for the ages – with silver rising more than 150%.

Potential Market-Moving News This Week

• Wednesday, July 10th – FOMC Minutes. The June FOMC meeting kicked up speculation about the possibility of Fed "tapering" on QE. Expect the release of the minutes from that meeting to reinforce traders' concerns, even though Fed officials have since back-pedaled.
• Friday, July 12th – Producer Price Index. Wholesale prices remain well under control for the time being. However, if crude oil (now over $100 per barrel) continues to rise, inflationary pressures could soon register in the data.
• Friday, July 12th – Consumer Sentiment. Surveys on sentiment have provided mixed results recently. Higher stock and home prices provide tailwinds, but the rate of employment remains dismal.