Japan's long term affect on the gold price

Japan's long term affect on the gold price

The recent earthquake in Japan had very little affect on the price of gold, only a relatively small 15 dip took place after the news came out but the price recovered fairly quickly. Compared to stocks, gold held its value very well during the few days when markets were falling almost in panic. The reason behind this is that gold is not widely used in the manufacturing industry and there aren't any big gold mines near the disaster area so the supply chain did not suffer any damages.

The long term affects are more currency related as the value of gold traditionally moves inversely to the main fiat currencies, such as the Japanese Yen. The Japanese government has already pumped more money in to the markets to support the economy. This will depreciate the Yen and push up gold.

Depreciation of the Yen will most likely affect on other main currencies in the longer term as it will make Japanese products cheaper. This consequently will force other central banks to depreciate their currencies and the money printing race between large economic powers will begin again. This is likely to be gold supportive as we have already seen last Autumn when the FED began the second quantitative easing round and pushed the gold price to new records.

When looking beyond the short term consequences of the earthquake and should people consider investing in gold, it is important to look at the most important factor affecting the price of gold, inflation. Presently European nations, especially the United Kingdom are struggling to keep the CPI below the recommended 3% because of rising commodity prices and increases in money supply mainly in the first two quarters in 2010.

The recent military actions against the Libyan dictator Muanmar Gaddafi are likely keep gold high in the short-term as Libya is one of the largest oil exporters and currently production has stopped. The value of gold traditionally follows oil rather tightly and as the supply side looks very unstable in North Africa, oil is likely to keep rallying.

The price of oil might even jeopardise the recovery in Europe and America, and force central banks to continue with their ultra loose monetary policy. This should encourage people to buy gold as low interest rates with increasing commodity prices will lead into higher inflation in the long-run.

If the unrest spreads to other major oil producing nations in the Middle East and North Africa, gold might reach $1500/oz in the coming weeks. Increasing military tension in the region would significantly harm the global economy and it is unlikely that the U.S would let its Saudi allies slip into a civil war, however the uncertainty is enough to keep the gold train going.

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