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Why Stocks and Gold Crashed

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Washington’s Blog
Sept 24, 2011

Stocks and Gold Have Worst Week In Years

The Dow had its worst week since 2008.

Gold and silver tanked as well:

Gold futures dropped 5.8% Friday, the biggest one-day loss in five years, as investors rushed to cash out of some of their most profitable investments in the hopes of making up for losses elsewhere. The decline capped gold’s worst week since 1983. Silver was even harder hit, plunging 18% for its largest single-day decline since 1987.

What’s going on?

Investors Bet On QE3, PM Margin Hikes, Sovereign Risk

As the Wall Street Journal notes:

Investors have grown increasingly skeptical of policy makers’ ability to revive the global economy, and of their willingness to bring about a resolution to the European debt crisis.

The broader rout has left many investors with unexpected losses, driving some to part with some of their better performing investments, among them gold and silver.


Some hedge funds were selling to raise cash to meet margin calls from lenders. Other investors were using proceeds of silver and gold sales to replenish other parts of their portfolios, which had fallen in value in recent sessions, said George Gero, precious metals strategist at RBC Global Futures.

In addition, it appeared that European banks were selling gold, possibly in order to raise cash and shore up their balance sheets, Mr. Gero said. This selling was then magnified by so-called momentum traders whose strategy is to piggyback on moves up or down in price.


The recent downdraft for precious metals came after the Federal Reserve this week acknowledged the economy is in worse shape than it thought, a sign that inflation will be of no concern for some time. As well, economic data out of China and Europe indicated that the global economy continues to lose steam.

  • A d v e r t i s e m e n t

Investors are spooked, indeed. As the Telegraph notes, credit risk is as great as it was right before the Lehman crisis:


Key indicators of credit stress have reached the danger levels seen before the Lehman Brothers failure three years ago, with Markit’s iTraxx Crossover index – or “fear gauge” – of corporate bonds surging 56 basis points to 857 on Thursday.

Of course – as I’ve noted for 3 years – there wouldn’t be a crisis today if banks’ toxic gambling debts hadn’t been assumed by the world’s central banks.

Art Cashin also points out the echoes of 2008:


All asset classes saw sudden and sharp moves far in excess of normal volatility patterns. To an old timer, that points to one conclusion. Liquidation. Wide-spread liquidation across asset classes. Currencies, bonds, commodities and stocks all moved swiftly and sharply in a direction that screamed – Seek safety! Raise cash! Get liquid!

European banks tottered amid more rumors and, there was a sense that in the U.S. solutions were slipping away as political acrimony grows. Even the old reliable China growth story got dinged. Chinese manufacturing numbers hinted a slowdown if not recession. FedEx added to the China worries by noting a sharp drop-off in Asian technology shipments. There were also reports that folks were having a tough time getting paid by Chinese counterparties.

All of that had a quick and discernible negative impact on markets. But, the selling was far more pervasive and dramatic than simply a conscious adjustment of positions based upon new data. Thursday’s action screamed liquidation – and not all of it voluntary.

That, in turn, brought echoes of 2008. Who were today’s counterparties? Was there an AIG type in the new European crisis? Those are the kinds of unknowns that fuel liquidations. Everyone begins asking everyone else to put up more collateral. It becomes a feeding frenzy for the rumormongers. They can make anyone a victim. With counterparties unidentified, there is almost no way to counter wild rumors.

See this for more on counterparty risk. (Of course, everyone but the big banks and their minions fought for transparency in derivatives. But Washington, Paris and the other financial centers caved into the lobbyists.)

Indeed, investors apparently couldn’t care less about a looming shutdown of the American government. After all, everyone knows that the government doesn’t actually stabilize the economy by enforcing laws, cracking down on ubiquitous Wall Street fraud, or requiring honest accounting and a true free market any more. And helping the little guy and the real economy? Uh, no …

Investors seem to have been caught off guard, expecting that the Fed would launch QE3 to help the big boys. But Ben Bernanke can dole out the sugar if he wishes, whether or not the lights in the rest of Washington are turned off. So Bernanke and Tim Geithner are the only guys in Washington the big investors care about.

On the other hand, as Zero Hedge notes, CME hiked gold margins by 21%, silver by 16% and copper by 18% today. A leak of the margin hikes likely had a hand in today’s precious metals crash. See this.

This article was posted: Saturday, September 24, 2011 at 4:16 am

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