Confessions Of A Former Gold Bear

September 16, 2013

Only emerging-market savers need gold and silver, right?


[This article originally appeared on and is republished here with permission.]


Sunday, Sept. 15 marked the five-year anniversary of the collapse of Lehman Brothers.

Lehman Brothers was a large international bank based in 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 Lehman’s reputation (if not its balance sheet, it wasn'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, it had been trying to get funding or support from the Federal Reserve and other banking organizations. Having failed to get funding, it 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 U.S. economy. Others say it was banking politics. But whatever the true reason, it’s water under the bridge now, just like the Lehman brand.

At that time, the gold price 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, it 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.

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