In 2007, the world economy began to show signs of an impending downturn. At the beginning of March 2008, the Federal Reserve was forced to rescue the corporate bank Bear Stearns. Suddenly, the crisis became an undeniable fact, even among the most optimistic among us. That very same week, gold prices rose to over $1,000 dollar per troy ounce. The recession of 2008 began to gain in strength. The banking system came close to a complete collapse. On Monday September 15, 2008, the crisis reached a climax, when the U.S. bank Lehman Brothers filed for bankruptcy. One month later, the Dutch government, among many other governments, was forced to bailout the nation´s commercial banks: in October 2008, Fortis/ABN AMRO was nationalized. ING, Aegon and SNS Bank also received an injection of capital in the neighborhood of €14 billion euro.

What did the gold price do in 2008 between the moment of the bailout of Bear Stearns and the bankruptcy of Lehman Brothers six months later? The gold price should have risen, of course, you might be thinking at this point. But the exact opposite happened. The gold price declined: from over $1,000 per troy ounce to $775 per troy ounce on the very day Lehman went under. The day ABN AMRO was nationalized, and European governments were panicking and bailing out other illiquid banks, the gold price even declined to $730 per troy ounce. Ultimately, the gold price closed the year at $870 per ounce, still 13% lower than the price of gold at the time of the Bear Stearns bailout. How could it be that during the severest recession since the Great Depression of the 1930s gold prices dropped instead of rose? Is the whole reason for investing in gold not to protect us from precisely such crises?

What Happened on the Gold Market in 2007 and 2008

The gold price since the Bear Stearns bailout (March 2008) until 2010. Source: World Gold Council

Central Banks and the Gold Market

Bullion banks receive gold from the central bank through swaps. Source: TF Metals Report

The GOFO and the Gold Market

What Happened with GOFO, the Gold Market and the Dollar Market in 2008?

Repo fails were a big problem in 2008. Also more recently, at the end of 2017, did the fail rate go up sharply: a bad signal, since it means that the interbank market is drying up and is becoming riskier. Source: Alhambra Investments

Will Gold Prices Fall in the Next Crisis?


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