Earth in Upheaval – Monday Kitcommentary


Friday’s horrific natural disaster plunged the nation of Japan into what Prime Minister Naoto Kan has described as the worst crisis his country has faced since World War II.

Bullion BarsThe aftermath of the 9.0 earthquake is just beginning to take quantifiable shape but it has already resulted in some revisions of projections regarding Japan’s economic situation. At the moment, all efforts are being made to save as many lives as is still possible and to avert further collateral damage from the flooding, the continuing power and telecommunications outages, and the untold dangers being posed by the country’s several failing nuclear power plants.

As was largely expected, the Bank of Japan injected a record quantity of cash into the country’s financial system while also expanding its asset purchase program to double its previous size. Some 15 trillion yen were added to Japan’s money markets overnight in order to stabilize conditions and to avert an undesirable rise in the national currency that was seen as on the horizon in the wake of emergent repatriation of same.

The dual accommodative gesture by the BoJ managed to calm investors in the currency markets for the time being. The Japanese yen traded at 81.795 at last check, while the US dollar slipped to 76.47 (off by 0.08) on the trade-weighted index. Crude oil continued to fall, losing 68 cents to trade at $100.47 after having spent a period of overnight time under the century mark. Falling black gold prices dragged to Canadian dollar lower as well however.

Nevertheless, the Nikkei average sustained a nearly 634 point-large decline in Monday’s trading as the event has sparked fears that the Japanese economy may continue the contraction it had exhibited in the final quarter of 2010. Still, very few analysts are of the opinion that the disaster will undo the near-5% rate of global growth that was underway in 2010, or that the setback that the Japanese economy may suffer will be anything but a temporary one.

Amid the quite fluid economic and geopolitical conditions on display around the world as the middle of the year’s third month approaches, precious metals opened on a nervous and uncertain note for trading this morning. Gold continued to receive some additional safe-haven oriented bids and climbed $6.80 out of the market’s starting gate in New York (the initial quote was $1,426.40 for spot bid prices). Standard Bank (SA) notes a decline in speculative activity in gold. Open interest and net speculative length have shown marginal shrinkage in the most recent CFTC reporting period. However, there has also been a decline manifest in the amount of short positions present in the market.

Silver added only 3 pennies to Friday’s closing values however, to open at $35.93 per ounce. Unsurprisingly, platinum and palladium suffered some declines in value as news of Japanese auto plant closures continued to unnerve speculators in that niche. Platinum dropped $16 to the $1,761.00 per ounce mark, and palladium fell $8 to the $749.00 level. Rising risk-aversion is also contributing to the possibility of additional selling. There has been a waning of investor interest in palladium in recent trading sessions, as observed by Standard Bank (SA) commodity analysts in their most recent market report.

The initial gains in gold narrowed quite a bit within the first couple of hours of trading, and the yellow metals was showing a rise of less than $2 at last check, and a quoted bid nearer to the $1,422.00 level. Silver went into reverse and fell some 40 cents towards the $35.50 mark at last check. The losses in platinum and palladium aggravated during the mid-morning, with the former losing $46 to drop to the $1,731.00 level and the latter falling $14 to the $743.00 per ounce mark.

A small, overnight rise in local gold bar premia in Japan gave rise to some fresh bullish proclamations about the yellow metal and its near-term prospects in price, but such views appear to be ignoring the reality of the Japanese gold investment market.  The World Gold Council’s  findings continue to indicate that Japanese investor-owned gold has continued to flow back into the market for years, and that aside from a departure from the norm during QIV of 2008, investors in that country have been net sellers of gold bars on a quarterly basis for some time now.

This situation and on-going sales trend dates back to the beginning of 2006. Over the past five years, the outflow of small bullion gold bars from Japanese hands has totaled more than 220 tonnes. The Japanese public had been a sizeable buyer of gold in the years from 1999 to 2002. At that time, the Japanese buying public absorbed nearly 300 tonnes of gold (at a time when gold was scraping along the very bottom of the price charts) from the market. The tragic events of March 11 could well spark additional private hoard gold sales in that country at this juncture, rising ingot price premia notwithstanding.

The other important impact of the Japanese earthquake could be felt in the base and noble metals sector. Estimates indicate that metals demand in Japan may take anywhere from three to six months to recover as reconstruction efforts finally kick in and have an effect over that period of time.

"Demand for base metals, such as copper, zinc and nickel, may drop in the short term," said Kim Gyung Jung, an analyst at Eugene Investment & Securities Co. in Seoul, recalling a similar impact from the 6.9-magnitude earthquake in Kobe in 1995.

Also, it is no secret that Japan normally represents a large slice of the global platinum demand pie. Japanese offtake of platinum for jewellery and for automotive applications purposes has always been historically significant. Although the economic slowdown has put a dent into such demand, we are still talking about a country that absorbed over 500,000 ounces of the metal and placed them into the cars it built over the course of 2010. That figure comes close to being one-fifth of the global total platinum auto sector demand. In the palladium market, Japan is an even bigger player. More than three-quarter million ounces of palladium were taken off the market by the Japanese automobile industry last year.

With the majority of vehicle assembly plants (and almost all shipping facilities) remaining closed this morning, the platinum and palladium markets are justifiably under a cloud of some demand uncertainty at this juncture. For example, all of Toyota‘s factories were scheduled to be closed today, and the average output at the firm’s Japan-based plants averages almost 13,000 vehicles per working day. Nissan builds nearly 5,000 cars per day while Honda assembles slightly less than that number. Even the auto plants that remain undamaged by the quake have and will continue to have supply issues as roads, bridges, and railways all over the country remain partially or totally out of service.

Finally, something else that could temporarily feel the aftershocks of the Japanese economic slowdown in the wake of the actual terrestrial upheaval that it experienced last Friday, are uranium prices and the nuclear industry sector. "The market’s expectations for nuclear power expansion may be reduced in the near term while the world considers its options," BMO Capital Markets analyst Edward Sterck wrote in a note to clients. Our good friend Greg Barnes of TD Newcrest pointed out that after the Three Mile Island and Chernobyl disasters in 1979 and 1986, the uranium market went into "hibernation" for 20 years. At the present time Japan accounts for about 12% of total global uranium demand.

However significant and dominant the Japanese situation is at this moment, we must also keep our sights on Libya and the MENA region, the eurozone, and the upcoming Fed meeting. All of these various factors will combine to keep the markets on a busy (if nervous) footing for the remainder of the week. Stay tuned, and do not forget to also watch our new weekly video segment "In the Lead" — which debuts here today.

Until tomorrow,

Jon Nadler
Senior Analyst

Kitco Metals Inc.
North America and

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