Who needs gold five years after Lehman's?
The phones lit up when Northern Rock failed in September 2007. But demand to buy gold was simply phenomenal when Lehmans failed 12 months later.
The reason? 'I want to get my money out of the bank,' said a flood of email enquiries. But instead of forming a queue in an old-fashioned bank run, savers found CHAPS transfers now made a quicker and simpler exit. And in the first financial panic of the digital age, it was still gold – the barbarous relic – that made the perfect safe haven once more.
'I am told of [a man who] caused an Iron Chest to be brought, and put the Money in it, then drove Posts into the Ground in his Cellar, and chain'd the Iron Chest down to the Stakes, then chain'd it also to the Wall, and Barricaded the Doors and Window of the Cellar with Iron, and all for fear, not of Thieves to steal the Money, but for fear the Money, Chest and all should fly away into the air.'
So joked one financial hack (probably Daniel Defoe) when the South Sea Bubble blew up in 1720. Almost 300 years later, that same gut-level instinct took hold when Lehmans went under in 2008. A fast-growing handful of savers rushed to convert their all-too digital credits into very real physical bullion, and lock it securely inside high-security vaults. And little wonder. Because when the panic broke out of Wall Street and the City, running amok among policy-makers, headline writers and households worldwide, all that 'wealth' built up during the global credit bubble really did look ready to vanish into the air.
Of course, gold during crisis is not guaranteed to rise in price, nor even hold flat. Economists and financial advisors will soon tell you that. But in terms of value? Buying the security and confidence of solid gold became urgent in mid-September 2008 for a fast-growing handful of savers.
That Monday morning, gold prices jumped in Asian trade, only to drift back as stock markets sank, and money fled into government bonds, on news that Lehman Brothers – a major player in commodity futures – had filed for Chapter 11 bankruptcy. Freezing its clients' positions, that sucked air out of the gold futures market as surely as it sank everything else. Other investment banks' fire-sales and government rescues tightened trading credit still further. So the 'net long' position of speculative traders, who bet on the direction of prices rather than buying or selling physical metal, shrank by 75 per cent from its summer '08 peak. But as that collapse in gold futures positions pulled gold prices down, physical investment demand leapt worldwide.
The week Lehmans failed, our gold trading trebled. Over the next month we gained 1,700 new customers, adding 25 per cent to our client base. All together, September 2008 saw users grow their physical gold holdings by 22 per cent, adding more than two tonnes of gold between them. And as the crisis worsened into new year, one pound in every £100 pulled out of the banks by UK households was being transferred to buy gold.
Today some of those numbers seem quaint. Our users now own more than 32 tonnes of gold altogether. But the gold price, of course, has gone in the other direction. Does that undo its safe-haven role?
Nothing about gold has changed since 2008, nor will it. You still need cyanide to dissolve it. Gold does so little that it won't even rust. Real interest rates, however, have turned higher since the crisis peaked in 2011 with the US debt downgrade, eurozone crunch, and English riots. With the sense of crisis receding, it's only natural again that the gold price has dropped. But that doesn't diminish its value as crisis insurance by any measure.
Buying gold – and locking it safe in a vault – is perfectly rational when banks, markets or governments fail. It's also made sense for those people seizing this year's sharp price drop to start building their holdings, too. Because unlike credit and debt investments (including bank deposits, remember) gold cannot be destroyed. It is rare and tightly supplied, unlike the flood of central-bank money thrown at the crisis. Thirdly, it trades in a deep, 24-hour market worldwide, unlike real estate.
Finally, gold's price has never been recorded at zero, not in 2,700 years of monetary use. That made it shine in 2008. Because a bond, derivative or property you can't sell or borrow against is worthless.
Few of 2008's buyers knew, however, that gold had already trebled in price since Gordon Brown's sales. His laughable claims to have ended the 'boom and bust' cycle only meant a historic crash had become certain. Today's economic revival might look just as flimsy when you account for quantitative easing, near-zero interest rates, and the south-east's fake property boom via the Coalition's help-to-sell scheme.
Still, five years after Lehmans collapsed, that crisis now looks a long way behind us. Who really needs financial insurance today?
Adrian Ash is head of research at BullionVault.com