Why May's Gains Can Continue


". . .the primary driver for oil, gold and commodities is the weakening dollar. . ."

The book is closed on May, and what a great month it was for commodities, precious metals and emerging markets. And there are several good reasons to believe that the strong performance will continue in June and beyond.

The price of oil rose nearly 30% in May to close above $66 a barrel—the biggest monthly gain since March 1999, when it climbed more than 36%. Natural gas picked up 14%, reversing its negative trend so far in 2009.

Gold was up more than 10% in May, its best month since November, and is once again nudging close to the $1,000-per-ounce mark. Silver turned in its best monthly showing in more than two decades—the futures contract for July delivery rose 27%. It was a good month for copper—up about 9%. It's now up more than 57% YTD.

We have seen signs of improving health in the global economy for a few months in better-than-expected economic growth rates, industrial production, consumer confidence and other measures. The positive indicators prompted OPEC's secretary general to say Friday that he expects oil prices to be as high as $75 a barrel by year-end.

But the primary driver for oil, gold and commodities is the weakening dollar, and there is little reason to think that the dollar will strengthen any time soon. The dollar hit a five-month low against major currencies on Friday.

The dollar's precarious standing has contributed to fears of waning demand at future Treasury auctions.

Treasury officials held their breath going into a sale of $26 billion worth of seven-year notes on Thursday. That auction went off successfully, but the fear that buyers will stop showing up remains.

A failed Treasury auction could be catastrophic for the dollar.

The second quarter usually sees seasonal weakness, but the first two months of the current quarter have defied that historical tendency. China usually sees a slowdown in the second quarter, but not this year.

One possible explanation is that after such a big overshoot to the downside in the two previous quarters, we are now seeing markets swing back toward a balance. If that's the case, it's one more reason to be thinking positive.

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