Confessions Of A Former Gold Bear

THIS SUNDAY, September 15, marks the five-year anniversary of the collapse of Lehman Brothers.  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 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 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 QE 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.

Miguel Perez-Santalla

(c) BullionVault 2013

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.