Why did people buy gold amid the Lehman's crash?
"I HEARD your advert on the radio. I want to buy some gold,"
recalls Adrian Ash at BullionVault.
So said one of hundreds of callers to BullionVault in the crisp, clear autumn of 2008...back when the failure of US investment bank Lehman Brothers tipped the world as they knew it into freefall.
"Certainly sir – just to note though," we corrected, "it wasn't an advert.
Just an interview."
But gold pretty much sold itself as the global financial system crashed in late 2008.
Or more correctly, the banking crash sold gold better than any copy-writer could.
As you can see, buying gold tends to gain appeal when other assets do badly.
Over the 13 years since BullionVault opened in fact, net demand to buy gold among our client-base of private investors (primarily in North America and Western Europe) has shown a far greater connection to moves in the stock market than it has to the price of gold itself (a typical 12-month correlation, stats fans, of -0.5 versus 0.0).
But our chart of gold buying versus the stock market also shows that gold sells best of all when central bankers lose control. And 10 years ago the authorities lost control for the first time since the wipe-out inflation of the 1970s.
Wealth began to evaporate – this time suddenly, through direct destruction in an uncontained crisis.
"I was finding it a little hard to breathe," gasps columnist John Authers in the
Financial Times,
confessing his own memories of the week few will ever forget.
"There was a bank run happening, in New York's financial district. The people panicking were the Wall Streeters who best understood what was going on."
We barely found time for a cigarette here at BullionVault too, but for happier reasons. "One of the points of owning gold is to
make financial crises fun," BullionVault founder Paul Tustain had forecast more than two years earlier. And while the phones lit up 12 months before Lehmans – back when UK mortgage lender
Northern Rock collapsed in September 2007 – new interest in buying gold became phenomenal when the credit crunch went global in autumn 2008.
Amid the surge in new clients and gold buying, we saw a jump in new accounts registered by people living around the financial districts of New York and London – nearly three times as many in the last 3 months of 2008 as over the previous 9 months combined.
If these "insiders" were panicking with their own money, as Authers now reveals in the
FT, few had noticed the crisis approaching. Now some were panicked into buying physical gold.
What drove them?
Day after day in the chaos following Lehman's collapse, corporate debt and equity markets went all offer, no bid – not beyond the market makers who promised to quote 2-way prices. They widened and slashed their quotes of course, because the investment banks and brokers didn't want to end up holding all the junk everyone else wanted to quit – and anyway, they might be on the brink of failing as well.
For sellers dumping assets into this plunge, that meant a nail-biting wait for each trade to settle. London and New York's stock markets worked on 3-day settlement, since reduced to T+2
in 2014 and
2017 respectively – but that's still an eternity when every Bloomberg and Reuters headline says the dominoes are tumbling.
And settlement into what? Cash on deposit at a bank also on the verge of collapse?!
"People are starting to question the wisdom of investing in banks and building societies," one gold buyer explained
right in the middle of the 2008 crisis.
"[The UK Government] has said it will guarantee individual savings accounts...but if it all goes terribly wrong does the government stand a chance of paying it back to everyone?"
Hold that thought. How about cold hard cash?
"Demand for thousand Swiss Franc bills really boomed since 2008," says Jean-Pierre Danthine, former vice-president of the Swiss National Bank. "We have daily data, so I can tell you
it started right after Lehman Brothers."
But cash can't work for large investors. The sums are too big, and finance houses can't start handing out bundles of readies to pensioners, insurance customers or investment-fund clients. (Plus, you try asking your bank to covert a £10m deposit into
a cage of banknotes. See how your relationship manager like it.)
Sovereign debt prices surged, pushing the yield offered to new buyers down towards zero. But those new buyers still rushed in as they quit equities, corporate bonds and the rest. Because return of, not return on money was what mattered. And even if the banking system did collapse, surely the government would stay good for the money you lent it directly.
Right?
John Authers:
"As it happened, I had a lot of cash in my bank account, at Citibank [from selling his flat back in London, apparently]. I was above the limit covered by US deposit insurance, so if Citi went bust, a once inconceivable event that I could now imagine, I would lose money for good.
"At lunch hour I headed to Citi, planning to take out half my money and put it into an account at the Chase branch next door. We were in midtown Manhattan...[and] I found a long queue, all well-dressed Wall Streeters...doing the same as me. [But] once I reached the relationship officer, who was great...she opened accounts for each of my children in trust, and a joint account with my wife.
"In just a few minutes I had quadrupled my deposit insurance coverage. I was now exposed to Uncle Sam, not Citi. With a smile she told me she had been doing this all morning. Neither she nor her friend [next door] at Chase had ever had requests to do this until that week."
And that was that. The
FT correspondent shuffled his own money around so that US taxpayers were on the hook...
...and he then decided ("the right call I think") not to tell his readers about the open panic he'd just witnessed and joined in Manhattan, for fear of
shouting "Fire!" in a crowded theatre.
Clearly, he's been much-exercised by the moral and ethical questions this raises ever since. Clearly he's genuine in thinking he chose for the best. "What has been most extraordinary," said a frazzled-looking Authers
that same evening in September 2008 to viewers of the
FT's Short View video, "has been a huge flight to safety today." Again, he failed to mention his own retail-customer role in that flight. More extraordinary still however was where that flight led, because it pointed the way first to the resolution of the banking crash – already underway as Uncle Sam started pouring
$182bn into insurance-giant AIG – and then moved on to create the post-crisis mess we're all now stuck in.
The next week Ireland made a grab for UK bank savings, making an
"unlimited guarantee" on pretty much all of the Republic's commercial banks. The UK itself then nationalized RBS, HBOS and part of Lloyds,
throwing £37bn at those banks by mid-October. Germany meantime rushed to open a
"bottomless pit" of state aid, starting with €480bn and nationalizing Hypo Real Estate. Japan felt
"only a ripple" after crashing two decades before and bailing out its banks ever since, but Tokyo still threw untold cash at the financial sector. China meantime began the
greatest stimulus package in history, a half-trillion dollar shopping and infrastructure binge aimed at offsetting the collapse in demand from Western consumers.
"How many...families would have had bank deposits above the insured limit?" asks Authers at the
FT, gamely responding to criticism of his Sept.2008 decision in the comments section below his 2018 confession.
"They suffered from the crash because the economy tanked – there was no way for them to avoid that. No consumer bank was allowed to fail. If they held stocks, they went down sharply in value, and then enjoyed a ten-year bull market. "
Letting the world burn wasn't an option. Indeed, letting Lehmans go worked like a flame-thrower in that crowded theatre.
But to preserve the world's savings, and then provoke a 10-year bull run in stocks, "The response to the crisis represented the
greatest looting of the public purse in history," writes Yves Smith at Naked Capitalism. "[And] after a decade of writing about the crisis, we are now subjected to an orgy of yet more chatter [from] the likes of Ben Bernanke, Timothy Geithner, and Hank Paulson [daring to] pitch the need for officialdom to have more bank bailout tools in a
New York Times op-ed titled
What We Need to Fight the Next Financial Crisis."
We'll confess: As reminiscences of the Lehman's crsis run, ours is pretty tame. Yes, it was hard work handling the surge in new business. Yes it was stressful, especially for the trading desk, racing each day to get more gold into the vaults – instantly snapped up by all those new buyers – while having to track and judge the credit standing of our own bullion-market counterparties (then, as now, standard settlement for large-bar gold is T+2). And yes, having cried "Fire!" for a half-decade and more, I worried how the crisis would hit friends and family after they'd ignored my "End of the World Is Nigh" sandwich-board when it mattered.
Any insight we can offer – beyond confirming that investment demand for gold tends to move inversely to the stock market – comes down to seeing people choose to buy gold as the banking bubble burst. It kind of replayed the choice I'd made myself ahead of the crisis, joining BullionVault in 2006 – when it had a staff of four, working out of a rented basement – instead of going to third-stage interview at a bunch (no kidding) of investment banks.
My job description ever since might sound a lot like shouting "Fire!" But unlike many precious-metal salesmen, I shan't pretend that gold always proves a universal cure-all.
Ten years ago it
sank during the Lehman's crisis, as well as jumping. We saw $100 moves inside a day, because nothing was immune to the panic selling which the Lehman's crash sparked. So it wasn't all laughs in the gold market. The kind of crisis we had feared and forecast proved even more dark than we'd guessed, even though, out the other side, the gold soared to become (and remain) the best performing asset class of the century so far.
Why? People buy gold to protect their savings not because it is rare, yellow or shiny, but because of what it isn't. Gold isn't debt, equity or any other financial promise. It doesn't rely on anyone else's survival to exist. It can't be destroyed any more than it can be created at will.
Call it the
"gut level case for gold" – an urgent, all-consuming need to buy a dumb lump of metal which does so little, it doesn't even rust, but which people in all ages and all cultures have used to store value.
Governments, on the other hand – can they really never go bust? Compare the idea of Citibank failing – "a once inconceivable event that I could now imagine" as the FT's John Authers says of 2008 – or US money-market funds breaking the buck 2 days after Lehmans went, just like they were supposed never to.
When the next uncontained crisis takes hold, will the idea that banking deposit protection or government bonds might fail really stay inconceivable? What then for investors and savers?
Hey, is that smoke I can see...?
