Think only emerging markets need gold and silver?
This ex-bear did before Lehmans...
Lehman Brothers was large international bank based
out of New York. They were well-respected. In fact, they were considered a
rock in the marketplace.
The week before it happened I recall receiving a
telephone call from a customer, way down in Colombia. He asked me if I had
heard that Lehman
Brothers was in financial difficulty
and on the verge of bankruptcy. I was incredulous at the time. Sure, all the
banks were in trouble. But I hadn’t heard any concrete news from sources
about LEH in my market – physical precious metals. Knowing Lehmans reputation (if not its balancesheet;
they weren't a counterparty to my activity), I just couldn’t imagine it.
Yet my customer was right. A few short days later
Lehman Brothers declared bankruptcy. The weekend prior they had been trying
to get funding or support from the Federal Reserve and any other banking
organizations. Having failed to get funding they defaulted on transactions.
This collapse would have a domino effect.
Of course, all this was preceded by Fannie Mae
and Freddie Mac having to be bailed out by the
Federal Reserve. Other groups such as 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 it's because Lehman held a great proportion
of foreign assets. So it was not as necessary to the US economy. Others say
it was banking politics. But whatever the true reason, it is water under the
bridge now, just like the Lehmans brand.
At that time gold was trading near the $900 per
ounce level. I believed that to be on the high side, actually expecting gold
to trade down to around $700. In fact I was a bear in the marketplace and was
often quoted as such in periodicals while I was working for Heraeus
Precious Metals in New York.
Even though the injection of capital through Tarp coming down the pike should
have given me a tip to what was possible from our central banking construct.
I couldn't imagine what was about to begin.
When Lehman collapsed they had to liquidate
positions. Gold was one of many commodities to be affected. The price of gold
traded as low as $680 in the coming days. But it started to rise when central
bank activity became clear. First we had huge injections of instant liquidity
with central bank loans. Then interest rates were cut almost to zero to help
ease pressure in the financial marketplace. But this was not enough, as the mortgage
crisis was not an insulated event.
It was an event of international magnitude.
Soon following it became evident that the
proportions of the credit expansion – and its collapse – exceeded US borders.
It reached into faraway economies such as Iceland, one of many nations to be
devastated by the credit crunch. The United Kingdom followed suit, having
emulated our business model in the housing and credit markets. The financial
world was a shambles, and the banking sector seemed doomed to collapse.
This alone should have been enough for me to become
a bull for gold and silver. Yet, I thought the lack of cash in people’s
pockets would actually be a negative factor depressing the precious metals
prices. Which it would, perhaps, if the politicians and central banks hadn't
decided the only way to save the whole system was to pump cash into bank balance
sheets, maintain their liquidity, and avoid further Lehmans-style
defaults at all costs.
I remember it like yesterday; my older brother
swearing that the Fed would pump cash to plug the holes – like giant potholes
– in our economy. In this world of fiat currencies, this would enable our
country to continue to keep on trucking. But the central banks would need to do more than
just fill the potholes. To try and generate growth they
wanted to increase liquidity. Greasing the gears meant printing more money
again.
The Federal Reserve Bank had to create new ways to
inject capital into the system, 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 on bank accounts. These
were all precursors to Quantitative Easing, which is a similar construct, but
creates money directly to buy government bonds.
Many people, much smarter than I and fearing runaway
inflation, 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 did
not get caught up chasing the price. I'd seen gold nearly as low as $250 an
ounce less than 10 years ago; it seemed preposterous to me for the public to
buy widely at these high prices.
Yes, 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 for solid insurance, especially in what we used to call Third World
and now emerging markets. But I confess – I never imagined that it could
happen in the United States of America.
Once Quantitative Easing began, it became apparent
that saving the banks and the economic system was more urgent than either
saving the jobs of the average citizen or protecting their welfare by
avoiding inflation. It finally started to click with me, too. The new
issuance of money was in reality a form of taxation to pay for the iniquities
of the financial system. It was also, in so small a way, due to the
incredible push of the US government – through legislation – to lend money to
the poorest of the poor to buy homes which they couldn’t afford. Rescuing the
banks which had made those bad loans meant settling the banks' own debts with
their creditors. So the 2008 bailouts were also tantamount to giving away our
tax money directly to Wall Street.
Understanding this, I realized the urgency of gold
and silver investment as insurance right here in the US. Previously, as I
said, such thinking seemed alien in the world's most developed economy. I
used to think of precious metals – such as my wife's jewelry – only as a last
line of defense, the final asset
to sell as a last resort in really bad times. But since
the Lehman collapse 5 years ago, I am convinced that everyone who has any
savings or assets should also hold gold and silver, simply in case our
financial system hits another wall. Because it can, and it did.
We are still not out of the woods; the US GDP is
anemic at best. The US is underemployed, although the statistics keep getting massaged to show otherwise.
College kids are not able to find employment , even
after having spent untold amounts of money for education they may never be
able to pay for. So not only has the government vastly increased personal debt
with the idea of home ownership for everyone. They’ve put the same weight
tied around the necks of our young generation, through the idea of college
for everyone.
Five years out from September 2008 we have not seen
the people responsible held accountable either. The problem? Many of the
culprits are in government themselves. Barney Frank, for instance, was an
integral proponent of the loose money-lending
prior to the mortgage collapse.
Then we have those that weakened the laws and methods surrounding mortgage
applications and bank leverage ratios. Where are they now? Heading for the
chairmanship of the Federal Reserve, apparently.
Will we ever see real justice? Will the middle class
regain their position and jobs? In my view the current structure of our
government, the antibusiness environment, and the over-regulation of what
some laughably call "free market capitalism" is all driving away
many of the better jobs that used to exist in this country.
I love my country, but we sure make a lot of
blunders. The collapse of Lehman Brothers may have been a critical moment in
US history. But instead of learning and improving how we arrange our society,
our governing bodies have decided to choke off business instead. I see
firsthand how many productive industries are now leaving our shores.
Maybe through some miracle the trend may be
reversed, and we can once again regain our position as the center of financial
power and productivity. But meantime, and accepting that the US today looks
too much like those Third World countries I used to believe were so
different, the only sure protection afforded us remains those assets that
never lose their intrinsic value, whatever the price today: gold and silver.
