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 with 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.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America