By Miguel Perez-Santalla ……….
Reflections on Precious Metals on the 5 Year Anniversary of the Collapse of Lehman Brothers
Five years ago, on September 15, 2008, Lehman Brothers collapsed and the entire U.S. financial systems threatened to go with it. In record numbers, investors looked to gold as a hedge against a plummeting stock market and shaky world economies.
The demise of Lehman was preceded by the Federal Reserve bail out of Fannie Mae and Freddie Mac. AIG, Bear Stearns, Merrill Lynch and the like found homes or benefactors and in essence were rescued. Lehman was allowed to collapse. Why? Some say because Lehman held a great proportion of foreign assets that were not as necessary to the US economy. Others say it was banking politics.
At that time gold was trading near $900 per ounce. I believed this to be on the high side and expected gold to trade down to around $700. Even though the injection of capital through Tarp should have given me a tip, I had no clue what the Fed was about to do.
When Lehman collapsed they had to liquidate positions. Gold was one of many commodities affected. The price of gold traded as low as $732 in the coming days. But it started to rise when central bank activity became clear. First we had the rate cuts to help ease pressure and added liquidity in the marketplace. But this was not enough as the mortgage crisis was not isolated.
Soon, the proportions of this credit expansion exceeded our borders and reached into faraway economies such as Iceland. Other nations were devastated. United Kingdom followed suit having emulated our business pattern in the credit markets.
The world was in shambles and the banking sector seemed doomed to collapse. This alone should of been enough for me to become a bull for gold and silver. Yet I thought the lack of cash in people’s pockets would be a negative factor, depressing precious metals prices.
I remember my older brother telling me that the Fed would pump cash in to fill holes, like giant potholes, in our economy. This would enable our country to continue to drive down the road. It was a necessary action for the Fed to take in this world of Fiat currencies. The central banks would need to put more in the just fill the potholes. To generate growth in the economy they must increase liquidity and that meant printing more money.
The Federal Reserve Bank had to create unique ways to inject capital, such as buying asset-backed commercial paper, increasing credit lines, adding new swap lines, buying back troubled assets and having the FDIC increase the deposit insurance. These were all precursors to Quantitative Easing, also a similar construct.
Many people, much smarter than I, began to buy gold. Gold had already broken the $1000 an ounce mark in March 2008 and was to do it again in February 2009. At first I still didn’t become bullish or get caught up in the price. I could not see how the public could buy gold at this high price. After having seen gold nearly as low as $250 an ounce less than 10 years ago, it seemed preposterous to me for it to go higher than $1100. It was at that point that I sold some of my own gold only to buy back later at a higher price.
It was during the same time that crude oil rose and caused the debacle in the auto industry. Large vehicles became anathema and so those returned on lease were pure loss. They had no way to recover from this unlikely event, as the large vehicles, prior to this fuel price situation were the most popular. In fact I remember seeing people driving Hummers, which were incredible gas guzzlers, as a status symbol. Not with crude trading at$120 a barrel. Then with this tremendous crisis facing General Motors and Chrysler, the US government again had to step in to save the day with large loans.
I always understood the safe haven mechanism of gold and silver. I had been in the business long enough to see the need that exists especially in what we called Third World or developing markets. I never in my imagination believed that it could happen in the United States of America.
I became a believer in gold and silver investment. I used to only think of it as a last line of defense. I would think of my wife’s jewelry as the last asset for really bad times and so it would be. But now five years after the Lehman collapse I am convinced that everyone who has assets should hold some in gold and silver simply in case our financial system has another hiccup.
About Miguel Perez-Santalla
Miguel Perez-Santalla, Vice President of BullionVault in New York, has more than 30 years’ experience in precious metals industry. Previously he was Vice President of marketing for the multinational precious metals concern Heraeus in New York. Miguel has been recognized by his peers as an expert on precious metals topics. He frequently presents at the International Precious Metals Institute and other venues. He is host of New York Markets Live, a weekly Internet radio show that examines all aspects of the precious metals market.