Gold uncertain after quake and recent selloff

SPECIAL BULLETIN – The Japanese Earthquake and its Aftermath

The world’s third largest economy came to a virtual standstill as one of the more powerful earthquakes in recent memory, and, indeed, in recorded history, struck Japan and unleashed a literal tidal wave of death and destruction overnight. The Nikkei average fell by more than three percent (before closing early) following the huge, 8.9 point tremor that hit in the mid-afternoon local time. The Tohoku area of Japan contributes roughly 8% to Japan’s annual GDP.

The current death toll in the coastal city of Sendai for example, is nearing 300, and the toll on the country’s overall economy will as yet take some time to fully fathom. Commodities markets interpreted this tragic geologic event as obviously bearish for the moment, and they quickly reflected such perceptions with a more than 3.5% decline in crude oil, a 1%+ sell-off in copper, a larger than 2% drop in silver, and a 2.8% decline in palladium as well. All of Japan’s ports were ordered closed and they halted all unloading operations, while Tokyo’s subways and suburban rail transit system were also shut down.

Several large plants operated by Sony (six plants), Toyota (at least two plants), and others were shut down in the wake of the natural disaster. Black gold fell to under the century mark for the first time in more than one week, after speculators learned about the news that Japan had shut down not only manufacturing plants but also some oil processing facilities.

The Japanese yen gained several notches in value as currency traders saw scope for the Bank of Japan to buy back some of its currency in repatriation efforts. The currency had tumbled severely in the immediate aftermath of the quake. The country’s central bank is slated to hold a policy meeting on Monday and will make a decision announcement on the same day, rather than stretching the event over two days’ time, as is normally the case.

With risk aversion on the retreat due to the Japanese disaster, market analysts and market participants have now shifted focus away from the still-in-upheaval MENA region and are choosing to play it safe as the weekend nears. "This natural disaster could result in another sharp rise in risk aversion on markets and a continuation of yesterday's correction on commodity markets," said a Commerzbank analyst earlier this morning.

Still, this monster quake might eventually prove to be a positive for certain commodities, as Japan will eventually come out of its momentary economic paralysis and commences rebuilding and recovery efforts that might necessitate steel, cement and other materials to be imported at higher levels. Still uncertain is the effect this event might have on gold, at least domestically. Gold traders still recall the sizeable domestic gold purchases that followed the Kobe earthquake of 1995 after NHK Television showed individuals holding piles of burned paper currency that they had kept in their residences.

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