Guest Post: The Lesson From Japan For PM Investors

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From Jeff Clark at Casey Research

The Lesson from Japan for PM Investors

It feels a little callous writing about Japan with respect to
precious metals after the country suffered such a terrible tragedy.
However, I think it’s worth discussing because there’s a lesson in it
for all of us. In fact, I think the moral could be couched in terms of a
warning.

Japan’s Background with Precious Metals

It’s
commonly known in Japanese culture that citizens harbor gold to protect
against unforeseen events. The gold isn’t sold unless it’s needed for
an emergency. With respect to the Japanese government, the country’s
central bank is the 8th largest holder of the metal
(including the IMF and GLD). Beyond investment, Japan represents about
6% of worldwide gold fabrication (excluding investment demand), the
majority of which is in electronics. Scrap recycling has been heavy in
recent years, while jewelry demand is low.

Regarding silver, the
tiny island represents about 9% of global demand. Industrial uses
comprise the biggest part of that, which includes the automotive
industry, construction, medical uses and solar. Jewelry and silverware
have minimal end-use, and photography, like most everywhere else, has
been falling heavily.

Japan’s Trend with PMs

While
the percentage of Japan’s buying to worldwide demand won’t drastically
change in reaction to the recent disasters, they, like several other
countries, are pursing another tactic to get minerals. The government is
considering revising its mining law, specifically when it comes to
seabed mineral exploration and extraction. This is noteworthy because
Japan hasn’t touched its mining law in 50 years. To be sure, revisions
will be stricter for permitting and monitoring, but the process will be
streamlined for Japanese companies.

Why now? As an executive at
Mitsubishi Materials put it, “it’s an issue of national interest”
because China, Russia, and South Korea are already exploring parts of
the country’s exclusive economic zone. They are undoubtedly feeling the
pressure of not only wanting what they think is rightfully theirs, but
also of wanting to capitalize on high metals prices.

The Lesson from Japan

Premiums for gold and
silver there have risen in response to the disasters, which isn’t
surprising. Japanese investors scrambled for physical metals after the
earthquake, immediately pushing premiums to three-year highs. And it
wasn’t just buyers in the earthquake, tsunami and nuclear-plant zones;
those in less affected parts of the nation have been rushing to buy
precious metals, too. The end result is that available supply has been
glutted.

The reactionary buying in Japan could not just support
metals prices, but push them higher. This is certainly due to the
draining of supply, but also because it’s complicating delivery and
exacerbating fabrication problems. The country is a net gold exporter,
but there may not be many planes and boats loaded with bullion leaving
ports anytime soon, given that many modes of transportation are down and
the distribution of more urgent food and other supplies is complicated.

This
could dry up gold supplies elsewhere in Asia, as Japan exported 2.7
million ounces last year. While this is only roughly 2.3% of global
supply, these ounces are concentrated in Asia, a region that has already
seen many countries’ citizens hoarding precious metals. If supply
becomes scant across Asia, it’s easy to see how this could light a fire
under prices.

As Mark Pervan, head of commodities research at ANZ,
said, "This is a buy-on-the-dip opportunity. Investors, not just Japan
but globally, have been looking for a trigger to get back into the
market. The rise in premiums in Japan could be it."

The lesson is
this: When disaster strikes, it’s almost certainly too late to buy. Not
only will you pay a higher premium, you may have difficulty getting your
hands on bullion. You have to purchase your insurance before adversity
hits.

And the warning is this: We saw how supply dried up and
premiums skyrocketed during the market meltdown of 2008. Europe saw the
same result when Greece imploded. We’re now seeing it happen in Asia due
to Japan’s woes. We keep seeing this picture repeat. While no one wants
to bet on calamity, is the U.S. really immune from trouble? Are you?

Even
if no natural disaster strikes North America, there’s a certain hazard
that’s inescapable at this point. The abuse being heaped upon the U.S.
dollar has not fully played out. Sooner or later the decline of the
mighty greenback will affect almost every area of your life. In fact,
what does your day involve that doesn’t require money? Eating,
showering, driving, working, shopping, entertainment – all of these will
be grossly impacted by the demise of the currency unit used in this
country.

The monetary base continues to explode. With no fanfare,
it set another new record last week – $2.35 trillion. It’s up 18.7% just
since New Year's eve, and 39.2% since December 2008. These actions will
have consequences. They will lead to a monetary earthquake.

Your
heart went out to the people of Japan when you saw the pictures of the
devastation from the earthquake. Will you be ready when the currency
earthquake hits here? One of these days it’ll strike, and then it will
be too late to buy.

I hope you have sufficient asset protection to withstand the monetary storm that’s building off our coast.