Parallels to 2008 Lehman Brothers collapsePosted on — Leave a comment
The Brexit market shock of falling stock indexes, fluctuating currencies, and spiking gold prices has a familiar feeling to the market shock that occurred after Lehman Brothers bankruptcy in 2008.
In a sense, the collapse of Lehman on the most turbulent day of the global banking crisis set a precedent for all future market shocks. There are lessons in the market reaction to Lehmans downfall that can help gold investors set expectations following the Brexit market shock and spot prime opportunities for buying gold at reasonable prices.
A day that Wall Street wont forget:Lets go back to that transformative day of the financial market crisis: Sept. 15, 2008. Investors awoke that morning to learn the financial landscape had changed overnight. The biggest bombshell was the Chapter 11 filing of Lehman Brothers the investment banking and Wall Street behemoth with over $600 billion in assets, all of which had vanished over the course of a weekend.
Lehmans bankruptcy truly felt like a sky is falling moment for nearly all market participants. Stocks indexes around the world seemed to be stuck in a perpetual downward spiral in the following days, and no one knew what surprises would come out of blue as a result of Lehmans demise.
Charting golds reaction:Naturally, investors flocked to gold in the midst of this turmoil. Prices rose from around $740 per ounce just before Lehmans bankruptcy to over $900 per ounce justtwo weeks later. (See September 2008 chart.) But this rally in gold was short-lived. Investors who bought gold at these elevated prices saw them drop below where they were before the Lehman bankruptcyone month later. (See October 2008 chart.)
What was behind the retreat in gold prices and the round-trip volatility? Primarily it was a liquidity rush from investors looking to meet margin calls on their leveraged stock investments. While the financial meltdown and stock market correction continued to rage, gold prices cooled off and fell 15-20% from their crisis peaks.
Sparking golds record run:But once the margin covering had abated, the stage was set for a strong bull market in gold lasting nearly three years. Gold prices had bottomed around $712 per ounce in late October 2008, then climbed slowly and steadily to nearly $1,900 per ounce by September 2011 a total gain of over 166%.
It would not be surprising to see the same pattern in the gold market following the Brexit market shock a round-trip run-up in prices followed by a quick decline, then slow and steady appreciation over several years. We saw safe-haven buying and a price spike on June 24 the day after the world learned the result of the Brexit vote. Prices remained elevated during the next week as the market continued to digest the news and contend with the uncertainty.
Summer lull is hot time to buy:But the immediate shock of the Brexit outcome will lessen in the coming weeks. Gold prices may also come down from current levels as well. If so, the timing is ideal for investors looking to build gold positions for their personal wealth. Summer is typically the slow season for the gold market. Trading volume during July and August has historically been below other months of the calendar year. Buyers with the money to invest and the patience to watch how market trends develop may find good opportunities to purchase gold at relatively reasonable prices.
And because the uncertainty around the Brexit consequences will linger, gold is likely to remain an attractive safe haven for nervous investors with the potential to appreciate for many years to come. There are no guarantees of a similar outcome to what we saw after the Lehman market shock, but investors who are considering adding gold to their holdings should watch the gold market closely for prime buying opportunities to emerge.
Call Blanchard and Company now at1-866-629-2281to protect your portfolio as the Brexit aftershocks continue to unfold!