David Morris

LAST week brought up a host of challenging issues for investors which seem likely to build in intensity, at least in the short-term. The terrible earthquake and tsunami which hit Japan on Friday has added to nervousness leading to a general loss of risk appetite. The sell-off in equities, the surge in the yen and last week’s dollar rally all conspired to wrong-foot investors. Consequently, markets which have out-performed recently (such as oil and precious metals) have come under pressure as hedge funds and others rush to lighten up their long positions to raise cash.

The sell-off in oil was exacerbated by the shifting geopolitical situation across north Africa and the Middle East. In Libya, forces loyal to Gaddafi successfully counterattacked anti-government rebels. This increased the likelihood of a quick resolution to the unrest. In addition, the planned “Day of Rage” in Saudi Arabia passed without major incident. But there were violent protests in Bahrain on Sunday and Saudi forces have crossed over the causeway between the two kingdoms and have entered the main island. This has the potential to destabilise the region far more than protests within Saudi Arabia alone, as it pits Sunni against Shia in a highly visible manner. The prospect of an escalation in these tensions saw traders move back tentatively into crude oil yesterday.

Precious metals are also proving to be highly volatile. Last Friday, silver prices were slammed lower for a second day in a row with $36 per ounce proving to be a significant resistance level. Given the stunning rally in silver over the last six weeks, some profit-taking and consolidation would seem in order. Although silver then recovered strongly, it was caught up, along with crude oil, in a “risk asset” sell-off as long-side leveraged speculators were forced to unwind positions due to margin calls in other financial instruments. But despite this, precious metals are finally behaving as the ultimate stores of value. They are now eclipsing the US dollar as a safe-haven for investors. Although the sell-off in silver has been vicious, the bulls can take comfort that gold has managed to hold onto support in the $1,400/10 range. If it can hold above here, then this should help silver to stabilise, and build on support around the $34 level.