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The Bullion Report

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March 16, 2011 in 'The Bullion Report'

Disaster Demand in Precious MetalsDisaster Demand in Precious Metals

Last week’s earthquake in Japan has quickly escalated into a major disaster, with the ensuing tsunami and nuclear reactor meltdowns. The earthquake was the worst in the country’s recorded history, and the costs will no doubt be high in terms of victims as well as damage to key industries and the Japanese economy. The initial reaction brought a fresh wave of interest into precious metals, but the current climate seemed to favor liquidation of assets. What might the future hold for precious metals in the wake of this disaster?

 

Past performance is not indicative of future results.

***chart courtesy Gecko Software


Past performance is not indicative of future results.

***chart courtesy Gecko Software

 

 The initial catalyst for investment in commodities is likely to come following this round of sell-offs, which seems more liquidity based than fundamental in nature. It appears as though the sparks to this flight from stocks and commodities was struck as investors sought cash. However, a shift is probably just around the corner as the traditional haven status of markets like gold takes hold. To bolster this move, it is also possible (and I should emphasize that I am not advocating profiteering during tragedy) that the rebuilding of Japan could hold more potential for another bull run in commodities, especially precious metals.

The so-called commodity super-cycle was already underway, fueled by the urbanization of countries like China and India. That additional consumption and commodity demand was only weakly met by increased yields and production for certain commodities. Sure, economic slowdowns might have put a stopper in some of these markets, but where that bearish argument dead ends, a bullish argument for the investment side of the same commodities picks up. Investors who were uncertain about the future of some stocks and some currencies sought an alternative asset in gold and bonds as a means of potential asset preservation. Does that dry up when disaster strikes? Perhaps initially it will, but there is a long road ahead for Japan and the world markets. While certain things like oil and perhaps even precious metals will have a neutral to negative demand in the devastated nation, the potential gains in consumption on the path to recovery and after have historically balanced that picture.

Consider the following ideas.

Japan is one of the world’s largest economies. They also have a huge industry in electronics, which means certain physical metal demand. What demand? Components for electronics, laptops, and cell phones all require metals, including highly conductive gold and silver. Even without direct demand from Japan initially, analysts are forecasting that China will ramp up their production (and therefore metals consumption) of electronics and electronic components. Their demand has already been higher, led by stronger jewelry and investment sectors so a manufacturing boost would likely require another increase in gold and silver consumptive demand.

The automotive industry in Japan might be likewise hobbled, and damage assessments are still ongoing. This means that whichever producers pick up the slack will have increased needs for automotive catalysts and components and – you guessed it – PGMs like platinum and palladium. Is current damage to products and parts unlikely to leave things salvageable? Also possible. That means replacement stock when factories get up and running again.

And don’t forget other rebuilding efforts. Many lives have been lost, and again I do not want to downplay that, but there will be a lot of basic building demand and that could result in an influx of cash into the commodities markets as a whole: copper, aluminum, oil, natural gas, etc. Don’t forget that there could even be a boost to alternative energy sources on the heels of severe nuclear reactor failures. That might mean natural gas as well as solar power. Silver is a big part of the solar cell side of that industry, owing to its efficiency in absorbing the sun’s energy. Harnessing new power technologies is a real possibility.  

Summary

It is likely to take weeks or even months to get the full impact of the crisis in Japan. The initial spike in volatility will probably pave the way for particular opportunities in precious metals and beyond. Whatever trading is not boosted by fears of the complete score of the disaster will be carried by any momentum coming from a renewed interest in commodities as the nation rebuilds. It might not happen right away, but the world’s third largest economy will renew itself like a phoenix and until then there is potential in these markets. Maybe not an increase in jewelry purchases or anything that might be deemed a frivolity, but investment demand and supply building ahead of the demand renewal could add a lot of support to these markets and more.

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Disclaimer: The prices of precious metals and physical commodities are unpredictable and volatile. There is a substantial degree of a risk of loss in all trading. Past performance is not indicative of future results.