The Japan Aftermath

By: Elizabeth Kraus

“Our deepest sympathy for the people of Japan” – Regal Assets, LLC

While Obama wows to squeeze Kadafi out, the world could only watch spellbound, yet unable to help as Japan tragedy unfolded with the most punishing earthquake on record to plunge the nation into an apocalyptic scene. Thirty foot 30 tsunami waves hit Northern Japan, and crashed into California and the Pacific Northwest with six to eight-floor surges. My first thoughts as I watched the disaster unfold in Natori, was of Hiroshima and Nagasaki at the end of WWII as the powerful 8.9 magnitude temblor forced the shutdown of number of Japan’s oil refining facilities as well as some of its nuclear power plants. The situation continues to evolve, and the full scope of the disaster will not be understood for a long time. One critical aspect is the effect on Japan’s nuclear industry, which provides over 30% of the country’s electricity from 54 reactors.The loss of substantial refining capacity in the world’s third largest economy pummeling the financial market, the biggest effect on the world economy, further rolling oil prices have already cast a pall on the global recovery. Questioning the spectrum of comprehension, scientists questioned the limits of science, and believers questioned the limits of faith. “It’s a ‘yikes’ situation,” said James DiGeorgia, editor of the Gold & Energy Advisor. It is likely to inject more volatility into gasoline prices—raising the risk of even higher prices for American motorists, he added, “driving up the market price for everything from diesel and gasoline to jet fuel.”

Faced with mounting humanitarian and nuclear emergencies Sunday, as the death toll climbed astronomically to more than 10,000 and left more than 1 million without water or power, the country now is fighting to avert a meltdown at three nuclear reactors that could be a global devastation if it leaked. All this has brought the energy markets under pressure as analysts agree–Japan will need more energy to replace lost nuclear generation—and doubts its crippled infrastructure can quickly ramp up imports, which had also lead to a sell-off in most commodities on fears of destruction in demand in the world’s No.3 economy.

“Short-term oil prices will decline because Japan is one of the world’s largest oil importers and the Japanese economy will be severely and negatively impacted,” said Andrew Moorfield, head of oil and gas division at Lloyds banking group. “Long term oil prices will rise as the Japanese economy recovers and emerging market demand continues to grow,” he said. Oil prices fell 3 percent on Friday. While “The markets came off on Friday both due to reduction of tensions in the Middle East and worries about the economic impact of the unfolding tragedy in Japan, Gold rose about 1 percent on Monday as Japan battled to prevent a nuclear catastrophe, although declines in equities markets could also prompt investors to sell gold to cover losses. As the badly wounded nation has seen whole villages and towns wiped off the map by a wall of water, bringing in its wake an international humanitarian effort of epic scale, “some investors expect Japanese insurance companies to start selling their dollar assets to raise money. Gold could be boosted as an alternative currency itself,” said Ong Yi Ling, investment analyst at Phillip Futures in Singapore. “In the short term, I think gold prices will head up due to a flight to safety and investors seeking out a safe haven.”

“Although the Japanese disaster is of significant importance, the immediate impact on oil prices and gold will still be driven by the Middle East situation,” said Moorfield. Harry Tchilinguirian from BNP Paribas said that in the short term, disruption to Japan’s industries, freight and travel will generate a negative demand shock in light oil products. “Once reconstruction begins and industrial activity normalizes, we can expect a pick-up in distillate demand but also gasoline with a resumption of road travel,” he said. Olivier Jakob from Petromatrix consultancy said he expected fuel oil and gasoil prices to strengthen relative to crude and refining margins to improve as imports of products will need to rise amid closures of one-third of Japanese refining capacity.

Wells Fargo Securities analysts said crude oil tankers headed to Japan would be diverted to other Asian refineries. Oil, gold and the yen will be affected and they will rise…says most analysts in agreement, that in the mid-term Japan will be forced to import more fuel oil, LNG or coal. “Over the coming weeks, LNG imports will likely jump as gas-generated plants come back online and/or ramp-up to replace the nuclear capacity which is likely to be offline for months or more likely, years,” Eurasia Group analysts said in a note. The outlook for other commodities, such as copper CMCU3, rubber or grains, is similar to energy, with traders bearish in the short-term due to fires and closures at dozens of factories or because of difficult imports amid port closures. Outlook is bullish in the long run as reconstruction will require large amounts of copper, aluminum and steel. Japan accounts for around 5 percent of global copper consumption. Toyota Corp said it would suspend operations at all of its 12 factories in Japan.

“Although the major earthquake in Japan proved a double-edged sword for gold prices, Gold Bulls will not need to prove anything in 2011. They are going to be in charge. It’s the bears that will need to prove they can take the bull market down.” Stated Regal Assets analyst on Tuesday in response to rule 48 being enacted. They have failed miserably and will continue to fail, because investors want a tangible asset amid the chaos wreaked global economy, especially because of the earthquake and the Mideast mess. Already as the euro extended gains against the U.S. dollar in a short-squeeze play, precious metals investors rushed back into the market to assure they were not left behind if prices should continue climbing with all the global havoc.
“With the weakness in the dollar and a lot of global anxiety passing this past week, I think people want to hold something tangible in their portfolio,” said Senior Market Strategist Adam Klopfenstein at Lind-Waldock in Chicago. He added that the flare ups in North Africa and the Middle East, making investors “look to precious metals for that anxiety premium in fear, that if they’re not long on (gold) now, they would have to pay a significantly higher price to buy it after this coming week.”

So, even while the Bears keep warning that Bulls will get their comeuppance when the Fed ends this second round of quantitative easing as scheduled in mid-summer, they underestimate the Bernanke’s persistence. If he has not achieved its goal of a glide path to sub-8% unemployment and stable inflation, we can expect a third and fourth round of easing. Whatever it takes.

The commodity markets and Organization of the Petroleum Exporting Countries (OPEC) seem to understand this more than the equity bears. They realize that all this easing is cheapening the dollar. So they are pushing up the value of tangible goods to compensate. A supply shortfall is helping, but there’s more at play here. Commodities, especially oil, gold and grains, are the new global currency. They are universally fungible and useful. The target for gold by most analysts was $1600 in the first half of 2011, and we appear to be on that path. If you think of crude oil as a currency instead of just a fuel, you can already see at your gas tanks which due to the earthquake catastrophe will potentially rise to $130-$160.

Apart from the fear factor, one of the critical drivers pushing Gold upwards was European Central Bank President Jean-Claude Trichet stating on 3rd March that inflation warranted strong vigilance. This turned out to be a clear signal that the central bank will raise rate somewhere over the course of the next few months and supported the Euro. This hurt the prospects of the US dollar even when the global uncertainties seemed to have intensified the most in recent times. A brief sell off emerged in Gold once the prices tested highs near $1450 per ounce but the commodity recovered from lows under $1400 per ounce. A part of the sell off was triggered by crude’s reluctance to hold at its two and half year highs and a rebound in the US dollar after nearing 1.4000 levels against the Euro.

Meanwhile, in the US, the latest United States Mint sales figures show a solid 14,000 increase for the one-ounce American Gold Eagle bullion coins. That is nearly double the advance the Mint had reported during the previous seven days. The undertone remains positive for gold given the current dynamics and a close above the latest all time highs near $1450 would set the pace for further gains. MCX Gold futures for April soared well above Rs. 20200 per 10 grams and slipped as a effect of the moderation in global prices. Prices need to break above Rs. 21000 yet again to see ensure that the upward march to lifetime highs resumes. Concerns that insurrection would flow across North Africa to the oil-rich sultanates of the Middle East lifted crude oil by $4 and keeping prices in check. But straining to make a positive impact were upside surprises in U.S. and global manufacturing and services data, plus auto sales, same-store sales, initial unemployment claims and private payrolls data. “I think gold prices will head up due to a flight to safety and investors seeking out a safe haven,” repeated Ong Yi in Singapore.

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