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When Markets Go Bump In The Night (Part 1)

Author, Editor, Founder, and Executive Director @
October 5, 2016

“Gold has worked down from Alexander’s time. . .When something holds good for two thousand years, I do not believe it can be so because of prejudice or mistaken theory.” – Bernard Baruch

We should not be surprised that the long-standing troubles at Deutsche Bank would appear to be coming to a head now. For global financial centers, October is often the cruelest month – a time when stock markets and whole economies have been known to go bump in the night. The Panic of 1907, the Crash of ’29, Black Monday 1987, the Friday the 13th crash 1989, the Asia Crisis of 1997, the downturn of 2002 and the launch to bear market in 2007 – all took place in the month of October.

Deutsche Bank’s train wreck is being compared to the Lehman Brothers meltdown in 2008 as an event that could derail other international banks both in Europe and across the pond in the United States. “In our opinion,” says Nikolaos Panigirtoglou, JP Morgan market strategist, “it is not so much funding issues but rather derivatives exposures that are more likely to trouble markets going forward if Deutsche Bank concerns continue. This is especially true if these concerns propagate into a confidence crisis inducing more rapid unwinding of derivative contracts.” This past June, the International Monetary Fund issued a report citing Deutsche as “the most important net contributor to systemic risks” followed by HSBC and Credit Suisse.

Similarly, a recent report from the United Nations Conference on Trade and Development (UNCTAD) warns that “There remains a risk of deflationary spirals in which capital flight, currency devaluations and collapsing asset prices would stymie growth and shrink government revenues. As capital begins to flow out, there is now a real danger of entering a third phase of the financial crisis which began in the US housing market in late 2007 before spreading to the European bond market.” [Emphasis added.]

Gold firmly established its reputation as a hedge against disinflation and related systemic bank risks in the aftermath of the “Lehman moment” in 2008. An important component of gold’s rally this year has been capital flight from the global financial system pushed by the low-to-negative interest rate environment and the potential for resulting instability in the global banking sector. That flight to safety is likely to be compounded if the potential matures to major banks being pushed against the ropes. Deutsche Bank is this respect could be the first in a series of titanic financial sector disasters, much like what happened in 2008-2009.

As we ponder whether or not a third leg of the financial crisis might be upon us, we should recall that in the wake of the Lehman Brothers bankruptcy gold more than doubled in value over the ensuing three year period. As was the case with Lehman Brothers in 2008, the public discussion on Deutsche Bank earlier this month immediately went to whether or not it would be bailed out by the German government, Bundesbank or the ECB. Of course, in Lehman’s case the answer was “no” and many believe that withholding the bailout launched the 2008 financial crisis.

At first blush, European authorities including the German government rejected the idea of a bailout, though few believe that notion would prevail if push came to shove. The fact of the matter is that even if Europe would concede to a bailout, it would not necessarily reverse the negative effects on markets even if it were to occur. Stocks dropped precipitously in the wake of the 2007-2008 crisis and gold ultimately ran to all-time highs despite the U.S. federal government’s bailout measures.

Note also the initial gut-check drop from the $1000 mark early in the crisis. Gold dropped as major players were forced to liquidate paper gold holdings to cover losses in other parts of their trading books. At the time, the mantra for gold and silver was “buy the dips.” Many did just that and learned first-hand how gold acquired the safe haven reputation referenced by Mr. Baruch at the top of the page during a financial crisis launched on another October morning back in 1929.


For Part 2 of this discussion, “Too big to fail or too big to bail,” along with the rest of the October issue of News & Views – Forecasts, Commentary & Analysis on the Economy and Precious Metals, we invite to subscribe at our registration page.  There is no charge for the service and your participation is welcome.

Other topics covered in this month’s issue include Russia’s important policy of gold accumulation for its national treasury, the surprising strength in the silver ETFs, an interesting piece on the long-term evolution of the gold market and some background on what a prominent member of the Council on Foreign Relations thinks about gold (Titled “An enlightened minority”).  We think you will also gain from this issue’s Chart of the Month on gold under varying longer-term interest rate circumstances.

Michael J. Kosares has over 40 years’ experience in the gold business. He is the founder and executive director of USAGOLD (both the website and gold brokerage service), the author of three books on the gold market, and the editor of "News, Commentary & Analysis," the firm's client letter. He has written numerous magazine and internet essays and is well-known for his ongoing commentary on the gold market and its economic, political and financial underpinnings. 

Due primarily to the California Gold Rush, San Francisco’s population exploded from 1,000 to 100,000 in only two years.
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