Wondering what's next for gold and the precious metals? Well, the precious metals sector has taken quite a hit recently, dropping by over $35USD on March 15th, 2011 last week. What happened?
Looking back at the last 10 days and sifting it all out, it appears to be related to the yen and this story started on March 10th, 2011, when China announced a surprise trade deficit of $7.3 billion for the month of February. With the prospects of growth dampened, all the equity markets and all commodities dropped across the board. Gold fell $20 to $1412 while Silver fell $1 to $35. Adding fuel, the reports of Saudi police firing on protesters started a flight to safety. The USD and Treasuries strengthened. The yen started gaining strength from 83 to 82 to the USD.
Then on Tuesday morning March 15th the Japanese Nikkei drops over 10% on the dual punches of Prime Minister Kan's statement of the high risk of radiation leak and that the radiation level measured in Tokyo was surging to 23X the normal level. An analyst stated that:
Global markets are ignoring the impact of this. ... With a 12% down-move on the Nikkei, you’ve got to sell not just the Nikkei but also the S&P” and other global markets
Obligingly, all world markets took a dive for the day with gold down 3%, reaching a low of $1382 USD. Again commodities fell with the CCI index down 3% and with Agriculture leading, down 6%. Grains down 6% and Corn down 5%. The yen strengthens from 81 to 78 to the USD. The Bank of Japan injects $20 trillion yen ($250 billion) to calm the markets and a further $14 trillion yen ($170 billion) the next day.
Then the Japanese appealed for help to stop the rising yen. What with the damage from earthquake and tsunami curtailing growth, a surging yen exchange rate would be another blow for the export dependent Japanese economy. The G7 countries responded and acted during Asian hours in the morning of March 18th, 2011 to jointly apply selling pressure on the yen. The yen dropped back to 81 to the USD.
What has gold got to do with the yen currency? The author surmises it has to do with the so called "Yen Carry Trade". Simply, it is speculators borrowing on the yen and paying the low interest rates while using the funds in another currency to earn more elsewhere in the world or in other asset classes.
The author suspects that the surprise announcement about China's deficit on March 10th caught investors and the Yen Carry Speculators (YCS) by surprise. Some of the YCS's investments may have been in the surging commodities, metals and gold and precious metals sectors. As their investments fell on March 10th, they rushed to sell their liquid investments, driving the commodities and precious metals prices downwards and bought yen to close the trade out. This purchasing of yen drove the yen to USD ratio lower as the yen appreciated.
As the yen appreciated, this started a vicious spiral, that threatens to destroy the YCS, as the stronger yen removes any profit from the carry trade. The second market dive on March 15th just accelerated this process, as the losing investments were sold (further depressing commodities and gold and precious metals) and more yen was bought to pay back the loan. This rush on the yen caused it to peak with an almost 6% move, very unusual for a currency. The Japanese government needed to act quickly and needed help to stabilize their currency.
The rest is now almost history, as the yen has weakened again with the G7 intervention. A graphic of the yen moves for the last 30 days follows: (click to enlarge)
A graphic with gold prices for the last 30 days follows: (click to enlarge)
Note that the yen strengthens in the first chart prior to the gold price falling in the second chart. As the gold price falls, note that the yen takes a steeper dive as these moves reinforce each other. Finally, note that as Japan injects liquidity and the G7 intervenes to weaken the yen, the gold price stabilizes and now appears to be led upwards. Are the YCS again entering the precious metals markets?
If the assumptions that the yen carry trade was responsible for the dip in the gold price are correct, then the gold price should now resume their rise based upon the G7 support and the author's assessment of the present prevailing fundamentals of supply and demand factors.
The author is taking advantage of this gold and precious metals opportunity by investing in precious metal miners such as Goldcorp (NYSE:GG), Silvermex (OTC:GGCRF, TSX:SLX), Great Basin Gold (NYSEMKT:GBG) and exploration Juniors such as Torex Gold (OTCPK:TORXF, TSX:TXG), Victoria Gold (OTCPK:VITFF, TSX:VIT), Atac Resouces (OTCPK:ATADF, TSX:ATC) and Almaden Resources (AAU, TSX:AMM).
Disclosure: The author is long GG, GGCRF, GBG, TORXF, ATADF, AAU.
Disclaimer: The information and opinions contained within this document reflect the personal views of the author and should be viewed as food for thought and amusement only. The author may from time to time have a position in any of the securities mentioned. There are no guarantees of the accuracy, reliability or completeness of the information contained herein. Independent due diligence and discussions with one’s own investment and business advisor is strongly recommended. These writings are not to be construed as an offer or solicitation with respect to the purchase or sale of any security or as an endorsement of any product or service. We do not request or receive compensation in any form in order to feature companies in this publication. It is prohibited to copy or redistribute this document to any type of third party without the express permission of the author. This document may be quoted, in context, provided proper credit is given.