SPECIAL BULLETIN – The Japanese Earthquake and its Aftermath
A massive meltdown in precious metals and key commodities followed the massive meltdown in Japanese and world equities which followed the apparently imminent meltdown at the Fukushima nuclear plant in Japan. The overnight news that the power facility’s 19 tonnes’ worth of highly radioactive fuel rods have spent some time period being fully exposed, rattled global markets in a manner basically not seen since the great crash of 1987. The Nikkei benchmark average suffered its third worst ever loss, falling by more than 10.55 percent - the highest amount of value lost since that fateful Monday back in October of1987.
Overnight tallies of declines in assorted global stock indices revealed a bloodbath taking place following the spike in investor apprehensions related to Japan’s alarming woes and based upon the rise of risk aversion to a degree not seen since the deflationary scare of mid-2008. To wit: The MSCI World Index lost 2.2%, the S&P futures fell 2.3%, Seoul stocks lost 2.4%, Taiwan equities fell 3.4%, Stoxx Europe dropped 3.2%, and the list goes on. Germany announced the shutting down of all pre-1980-built nuclear power plants.
One would have logically anticipated at least a $50 rise in the one asset thought to be the ultimate safe-haven this morning, and new records being etched into the books at above $1,500 an ounce. History teaches that when paper assets slide, gold ought to shine and do so brighter than ever. Alas, this was not to be. The many months’ worth of ‘tandem” trading by hungry hedge funds yielded an equally sympathetic sell-off in the yellow metal this morning, as positions were unwound at lightning speed for a variety of reasons.
Whether speculators were anticipating sizeable enough margin calls from their equity positions to have to liquidate gold holdings, or whether they were simply taking refuge in the US dollar (which we had been assured would expire any day now), remains to yet be sorted out. The net result was one and the same: a massive exodus. The spot price of gold traded as low as $1,380.10 per ounce; some $65 lower than last week’s record, and about $48+ (about 3%) lower than Monday’s settlement.
Silver got the hitherto out-sized speculative hedge fund stuffing knocked out of it in a hurry this morning, losing more than $2.35 or about 6% early in the New York session and falling to $33.56 the ounce. Equally substantial declines followed in platinum and palladium as Tuesday’s trading action started to unfold.
The former fell as much as $66 per ounce to touch morning lows at the $1,689.00 mark and the latter dropped $44 to reach the round, $700 figure early on. The prestigious Gartman Letter sounded the alarm this morning in the following fashion: “If gold is under duress, silver, platinum and palladium are under even more, for they’d gone higher in parabolic fashion and they now have the greater distance into which to fall before finding any reasonable, logical support.”
However, on this eventful morning, we also take note of the fact that crude oil suffered an equally…crude trading fate on the day, losing about 4% in early going and declining to the $97.28 per-barrel level as specs dumped everything in sight in favor of the greenback. That type of nod towards the US dollar – with all of its flaws – is reminiscent of the summer of 2008 when it looked for all the world as if deflation was knocking on the door. Copper collapsed by over 2.2%, reaching just under $9K per metric tonne in London on the LME.
Japan’s Prime Minister Naoto Kan attempted to calm the denizens of his beleaguered country that, despite the constant disappearance of water and rice from market shelves, Japan’s food supplies are adequate and that the nuclear power plant crisis is not likely to mushroom into the unthinkable. That said, Mr. Kan also advised that it might be best for people in the affected areas to remain indoors and avoid unnecessary exposure to the elements.
The No. 3 reactor at the Fukushima plant emitted radiation levels of about four times as much as is thought to be resulting in increased in cancer incidents. Pumping of seawater into the affected reactors has thus far been a hit/miss proposition and has basically failed to do the job of cooling the fuel rods. Meanwhile, the public communications coming from Tokyo Power and other officials regarding the real state of affairs have now come under fire for being as obscure as the clouds of smoke that have occasionally risen above the affected facility, indicating on-going explosions.
Meanwhile, the Bank of Japan tried its own, one-day “pumping” operations this morning; those of additional cash into the country’s financial system. More than ¥8 trillion flowed into the market on the heels of the ¥15 trillion which had been injected on Monday. At what point the country’s central bank will need to “intervene” into the sinking market and purchase equities or expand the scope of its asset purchases remains as yet unclear.
However, any signs that the Japanese market is cracking could further contaminate the already stressed overseas ones and add fuel to the selling fire that is spreading fast around the globe. The FTSE fell 2.2% in London this morning, and the Dow opened with a very poor showing of its own; a 256-point decline (2.13%). Investors on both sides of the Atlantic were seen indiscriminately dumping banks, insurers, and boatloads of mining stocks – basically, the riskiest sectors of the markets – in a quest for temporary shelter from the global storm.
Large as the Japan-oriented headlines were this morning, there were smaller-font items that continued to trickle into the news flows out there. U.S. import prices rose by 1.4% in February, as the MENA-fueled spike in energy and food were reflected in them in obvious fashion. However, underlying price pressures remained subdued, and market pundits continue to envision a Fed that will “stay the course” following today’s FOMC meeting. Current expectations are that the QE2 asset buying program will be allowed to fully run its course and will expire at the end of June. What happens thereafter is less than clear at this time.
There are some analysts who do see a world of difference in how the US economy looked back in August (when the Fed gave its first indications of a possible QE2), and today’s readings of same. The disparity has led such market observers to opine that the $600 billion accommodation will not be completed as it poses more risks than offers rewards at this juncture. Meanwhile, the NY Fed’s general economic index (the Empire State Index) climbed to a reading of 17.5 from the 15.4 level it exhibited in February. The March reading of the NAHB homebuilders’ index gained a full point and rose beyond consensus expectations, to a reading of 17 this morning.
As we go to print this morning, the latest report is that 6.0 magnitude quake just rocked Shizuoka. The earthquake that is rocking the commodities and equities markets around the world, on the other hand, continues uninterrupted. Magnitudes will vary. Localized selling tsunamis could yet sweep over investors as well. Then again, so could aggressive buying waves, provided some positive news developments materializing. Remaining on the sidelines for the moment however, never looked so prudent.
Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America