How Gold Made a Sudden Shift

It came across radio news and the internet headlines, but not everyone has paid attention to it: The Feds refused to bail out Lehman Brothers. The story is merely a yawner to most folks who think that what happens on Wall Street will never affect their lives. Many of these same people do not understand why anyone would own gold or silver, nor would they recognize when a huge shift in buying gold will have occurred. Savvy investors know, though. September 14, 2008 may go down in history as the day when peoples' desire for gold shifted from an inflation hedge to keeping something in case our nation went broke.

To understand this shift, one must first recognize that gold has recently undergone a sharp correction. It slid from its high of $1000 to a recent low in the $700 range. It might have kept sliding downward, too, if not for the announcement that the government will not bail out LB. This investment brokerage house will face bankruptcy, and Uncle Sam doesn't have enough money in his pockets to help.

Like the Titanic sinking, ten banks failed in the first nine months of 2008, but the price of gold didn't seem to pay attention. It seemed, instead, completely tied to the price of oil. But it wasn't enough to keep gold on an upward climb. While it had gone up from the high $200 per ounce in 2004, suddenly it skyrocketed to $1000 per ounce. Sellers flocked to the nearest gold exchange shops to cash out. Then the price eroded 25%, even as bank after bank failed, and Freddie Mac and Fannie Mae fell under government takeover.

Up until the LB bankruptcy announcement, buyers invested in gold to hedge against inflation. As oil went up, and the cost of goods went up, the price of gold flew up as well. Thus it became an inflation hedge. After oil corrected, so did gold. Demand for the yellow metal became so intense in late August, that the metals quote site of Kitco.com announced that it was committed to filling the orders for customers for the price on the day the order was placed. In some towns, gold coins were scarce or non-existent. Coin dealers even offered a premium for them over the regular spot price. If there was anyone who believed that gold was going down for good, no one was listening to them.

Suddenly LB was in trouble and the media was talking about the possibility that some banks might go under. On a lesser tone, the news reported that AIG was headed for restructuring, and Merrill Lynch had to accept a buyout. In two days gold blitzed upward again. Now the yellow metal was the only safe thing to protect citizens from the fall of their money institutions, or even losing their jobs. Oil could go down, it seemed, but gold was on its own path.
The media currently reads the LB failure as something that could cripple the economy enough to thrust America into a depression. Only time will tell if that will happen, but in the meantime, everyone from Alan Greenspan to obscure men who can't hardly speak English are being interviewed like crazy, as long as they believe our nation is headed for disaster.

Ironically, On the Street interviews are turning up bizarre responses. One Lehman Brothers employee vilified the United State government for not bailing out, explaining that since Bear Sterns had been helped, why not LB? Her response was symbolic of the very problems that have led up to this shock wave. The people in this nation have over borrowed, and now she was expecting the government to live beyond its means, too, just to rescue a large business.

Another man went on record as saying it was just another day in the market, a good buying opportunity, and someday everyone would see that. He said nothing of the fact that the Dow has slid over 25% since its high. A buying opportunity is not during a downward market. It is typical of the exuberant buying at the height of the real estate boom. No one could have dreamed that when it corrected, it would correct so badly. Perhaps no one wants to feel the market could plummet another 50%.

What bothers so many people is that just like the Titanic sinking, so no one will ever be punished for the crazy loans, the over-inflated housing estimates, and any other unscrupulous activities. Many folks are angry that the top executives of these companies will go to their layoffs with all kinds of bonuses and outlandish severance pay. In a land where the taxpayer will have to bear the burden of the mistakes of the few, then watch them go home to their yachts and fancy houses, change must come. In the meantime, gold is the average man's consolation prize.