Gold rallies on no-fly zone, drops on cease fire

Indeed, Libya was not the only place where market-moving news issued forth from on this Friday that will cap a momentous week in global events. Japan remains very much at the front and center of global anxiety levels as the level of danger of its nuclear-plant crisis keeps rising. The latest reports indicate that the Japanese government lifted the severity rating of the Fukushima complex event to a 5 (out of a possible 7) on the scale of nuclear mishaps.

The 1,900+ metric tonnes of highly radioactive material that are said to be present at the complex (whether inside fuel rods or in spent fuel pools) poses an untold danger in the event they become fully exposed and begin to generate lethal amounts of radiation. The race against the clock continues, as does the mass exodus of foreign nationals from Japan. As of this writing, Prime Minister Naoto Kan described the nuclear crisis situation as “very grave.”

The situation on the currency markets had also turned “grave” enough – for the yen at least – in order for the G-7 to decide that “intervention” was in order. The Japanese currency had risen to a postwar high in an absurd and counterintuitive move that threatened to impact economic and financial stability at the worst possible time. At last check, the yen was trading at 81.15 against the greenback, while the latter continued to face difficulties on the trade-weighted index as it exhibited a 0.15 slippage to the 75.86 level and headed once again into ‘oversold’ territory.

Currency speculators went into a mass yen-buying feeding frenzy of epic proportions this week, as they hoped to capitalize on potential yen repatriation trends in the wake of the trifecta of disasters that is affecting Japan at the moment. However, a too-strong yen was going to clearly hamper rebuilding efforts, not to mention the capability of Japan’s firms to successfully export that which they produce.

Now, the G-7 has basically told speculators: “Not so fast, my friend,” and is effectively interdicting them from profiting from this unfortunate scenario. The 80-yen-to-the-dollar level is the perceived “line in the sand” that the G-7 nations have drawn in front of the speculative crowd at this time. Bring it on. For the first time since 2000. Yep, overt, concerted, market manipulation. Live with it – suggests the G-7.

More “manipulation” – of another type – was on display overnight, courtesy of the People’s Bank of China. The Chinese central bank lifted deposit ratio requirements for the country’s banks by half a percentage point this morning. This marked the third such tightening maneuver for the current year and is being interpreted as a possible precursor to a hike in key interest rates. As mentioned in yesterday’s article, China’s top priority at this point is the combat against inflation. As of the 25th of the month, banks must set aside 20% of their deposits for the scope of reserves with the PBOC.

Thus we cap a week that offered more Black Swans flying overhead that anyone could possibly have imagined when author Nassim Taleb first coined the expression back in 2007. If there are ways in which one can survive such a deleterious avian assault, MarketWatch’s Chuck Jaffe thinks he has at least five on offer for the average investor.

First: diversify (or die) – that’s a pretty obvious one, and one that is time-tested. A broad range of assets will better stand up to the type of surprises that Black Swans tend to bring. Second: Keep cash handy and in adequate supply. You’ll be surprised at how well it works in times of real need. Third: Second to cold, hard cash, the cold, hard(er) metal offers unparalleled comforts.

We suggest 10% as a core, sine-qua-non allocation to the shiny stuff. Fourth: Risk-mitigating hedge products. There’s a plethora of those on offer, but do your research to see what suits you best. Fifth: Mr. Jaffe suggests selling your winners and buying ‘losers.’ Sounds counterintuitive, but it apparently fits the “buy low/ sell high” mantra a whole lot better than the trend-following behavior that the average investor (sadly) normally exhibits.

We leave you now with our wishes for a hopefully calm(er) weekend. The world could use it.

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

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About the Author
Jon Nadler Jon Nadler is a Senior Analyst at Kitco Metals Inc. North America
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