Silver gives up 21% in May

In the Lead: “Pop-Pop, Fizz-Fizz…”

The quicker-than-anticipated resurgence of overall Japanese factory output encouraged automotive analysts to shine a very positive light on the sector as of this morning. Car production ranks as one of the pivotal pillars of the Japanese economy’s manufacturing sector. That said, there are a number of automotive analysts who do not expect US car sales to be very worthy of praise for the months of April and May, as the effects of the Japanese quake became manifest in the marketplace in North America. Edmunds.com actually expects a small dip in US car sales from levels recorded one year ago.

The other news item that appeared to be playing favorably this morning into the gains shown by the Dow for example, as well as by commodities, was the one surrounding the possibility of further aid to Greece being offered by the EU. Stories are circulating that Germany may drop its demands for a rescheduling of Greek debt and that such a shift may open the door to further assistance to the fiscally-stressed nation. In any case, the decision on any additional aid to Greece by the EU will come by the end of June. Thus, the end of June is shaping up to be a pivotal time for markets in more ways than one.

To what extent May’s downturn in commodities will eventually come to be regarded as a mere correction in a still-intact uptrend or the start of a “different” phase in the broader commodity cycle, well, that might become more clear with the benefit of a few additional months’ worth of hindsight. Boston-based GMO fund manager Jeremy Grantham sees the next couple of years as potentially posing a significant risk to commodity valuations due to any possible “surprises” in either Chinese growth, global weather, and, of course the expiration of QE2. Such sobering caution comes in the wake of certain valuations in certain commodities that have not been seen at such levels in a couple of…centuries (!).

For the time being however, a few things are fairly worthy of watching with care. The first is the fact that the US dollar is fast-approaching, or is perhaps already at, a significant inflection point on the index chart. If the positioning of the speculative trade is any indication of where currency players might be seeing the dollar as being headed, then we might take into account the fact that bearish bets on the greenback have now been pared back to a level not seen since last December. The CFTC’s trade positioning data as of May 24 reveals that pro-dollar bets are on the rise while the opposite are shrinking in the wake of the problems that have affected the euro.

Currency traders and speculators are also apparently not anticipating further major declines in the US currency against the yen, the Swiss franc, and the Canadian dollar. If perceptions that the global economic recovery is hitting a mid-cycle “air-pocket” are correct, then the “risk-on” trade might experience a decline in popularity that might help lift the greenback quite nicely from its early May paradigm where everyone and their cousin was massively shorting it. It could be that the bears might hibernate during the summer, for a change.

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