Gold Prices on Black Monday 1987 Went Crazy Along With Stocks

New York (Oct 20)  Stocks were not the only market that went berserk on Black Monday 30 years ago; so did gold and other commodities.

If there's a lesson to be learned for gold traders - yes, the metal is a safe haven, but sometimes it also acts as an ATM machine as investors make withdrawals to raise money. After initially soaring on Black Monday, gold then fell for the rest of the day and the next as investors sold whatever assets they could to generate cash.

Black Monday, which occurred on Oct. 19, 1987, has been described by news outlets as the worst day for equities in U.S. history. The Dow Jones Industrial Average fell 22.6%, or 508 points, in one day. This would be comparable to a 5,237-point decline from Wednesday's close.

George Gero, currently managing director with RBC Wealth Management, was a gold futures trader on the Comex floor on Black Monday.

"It was hectic and chaotic," he recalled. "It was sort of nerve-wracking because up until then, 100 points down (in the Dow) was a huge move that would take weeks. We weren't used to a move like that."
•Facts of Black Monday 1987, the Worst Single Day In Stock Market History

"It was the wildest day of my professional career, hands down," Wyckoff said.

Curiously, on the Friday ahead of Black Monday, front-month gold futures rose by $9.50, or 2.1%, to settle at $471.60, Wyckoff reported. As the bloodbath in stocks occurred on Black Monday, gold initially climbed $19.90, or 4.2%, to a high for the day of $491.50. But then the metal turned south and settled at $481.70 and the next day slid to $463.20, which was a loss of $28.30, or 5.8%, from Monday's peak.

"People were busy liquidating to raise cash," Gero said. "They were liquidating anything, including gold."

Wyckoff added that "people wanted to get out of any market" they could in "panic liquidation." Eventually, however, gold did take off, getting up to $502.30 in December 1987, Wyckoff pointed out.

Gero commented there have been other instances in which gold behaved similarly, such as the time around when Lehman Brothers failed and the Great Financial Crisis began in 2008.

•Peter Schiff Slams Federal Reserve's Response to Black Monday in 1987

"Normally what happens is people liquidate anything that is liquid when they have to raise cash," Gero said. "They're not thinking of buying anything for a hedge until afterwards."

Having said that, however, Gero said he also suspects investors might turn to gold as a hedge more quickly now than they did in 1987. He added that if a similar stock-market sell-off were to occur again, there are a number of factors now that could exacerbate the situation, such as algorithm trading and the end of daily price limits in many futures markets. When those price limits - both up and down -- were hit in the past, markets were shut down for a certain number of minutes to allow adjustments in margin calls and for market participants to recover, Geri explained.

There is one condition in place today that was comparable to autumn of 1987 - stocks have hit record highs. Could it happen again?

TheStreet