The massive earthquake and tsunami that has rocked Japan is being digested by markets and the economic ramifications and uncertainty is leading to risk aversion.
The massive earthquake measured 8.9 on the Richter scale and is the largest earthquake since 1896 and the 6th largest earthquake ever measured. It has triggered alarm that tsunamis may hit coastlines throughout the Pacific including on the U.S. western seaboard. A state of emergency has been declared at one of Japan's nuclear stations due to a fire and the process for cooling the nuclear reactor is 'not going as planned'.
Tokyo gold futures rose on the news with the most active gold contract on the Tokyo Commodity Exchange, February 2012 inching 0.22% higher to 118,000 yen prior to giving up those gains. Gold is marginally lower in dollars but higher in euros, Swiss francs and British pounds.
After the falls on Wall Street yesterday the Nikkei was already under pressure when news of the quake broke at the end of the trading day. The Nikkei fell 1.7% today and is down over 4.11% for the week.
The Japanese yen was sold in the immediate aftermath of the quake. Counter-intuitively it then recovered and is the strongest currency in the world today (see table). Market participants appear to be seriously underestimating the risk posed by the megaquake to the Japanese economy and assets.
Alternatively, there may have been intervention by the Japanese authorities in order to maintain confidence and protect the value of their currency and bonds. The Bank of Japan, like the Federal Reserve, regularly intervenes in foreign exchange markets and has even intervened in equity markets by buying ETFs linked to the Nikkei and the Topix.
The secretive Working Group on Financial Markets or 'Plunge Protection Team' in the US is known to intervene in markets in emergencies in order to prevent market panic. Maintaining confidence in the yen and by extension the dollar and the fiat monetary system, may be part of that mandate.
Long term government intervention and manipulation of markets is a recipe for disaster as it leads to distortions, imbalances and massive moral hazard. However, the megaquake in Japan could justify short term intervention and this may explain the yen's counter-intuitive surge in international markets.
Once there is more clarity regarding the scale of the economic destruction - the yen and JPY bonds will likely come under pressure. After the New Zealand earthquakes, there was a delayed reaction prior to selling of the Kiwi dollar and bonds. Incredibly, at its centre, the Japanese megaquake was a thousand times stronger than the one that devastated Christchurch in New Zealand just weeks ago.
Oil prices have pared losses seen on news of the quake and will likely be supported by the uncertainty in Libya and civil unrest in pivotal Saudi Arabia.
Considering the sharp selloff seen in equity markets in recent days, gold's resilience is impressive. Gold is down nearly 1% for the week and a lower weekly close could see the short term momentum change and a period of correction and consolidation.
Silver is down 1% for the week and may witness momentum-driven sharp selling on the COMEX in the short term but as ever the long term fundamentals remain very sound.
Sharp falls in equity markets could see margin-driven selling in the precious metal trading pits as was seen in recent years. Selloffs are buying opportunities and will likely again be short and shallow.
Gold is trading at $1,418.19/oz, €1,026.04/oz and £878.79/oz.
Silver is trading at $35.28/oz, €25.52/oz and £21.86/oz.
Platinum Group Metals
Platinum is trading at $1,775.00/oz, palladium at $766.00/oz and rhodium at $2,350/oz.