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Gold And Silver Are Acting Like It’s 2008. They May Be Right

2008 has special significance for gold bugs, both because of the money they lost in August of year and the money they made in the half-decade that followed. Today’s world is beginning to feel eerily similar.

Let’s start with a little background. The mid-2000s economy boomed in part because artificially low interest rates had ignited a housing mania which featured a huge increase in “subprime” mortgage lending. This – as all subprime lending binges eventually do – began to unravel in 2007. The consensus view was that subprime was “peripheral” and therefore unimportant. Here’s Fed Chair Ben Bernanke giving ever-credulous CNBC the benefit of his vast bubble experience.

The experts were catastrophically wrong, and in 2008 the periphery crisis spread to the core, threatening to kill the brand-name banks that had grown to dominate the US and Europe. The markets panicked, with even gold and silver (normally hedges against exactly this kind of financial crisis) plunging along with everything else. Gold lost about 20% of its market value in a single month:

Gold price in 2008

Gold mining stocks – always more volatile than the underlying metal – lost about half their value.

HUI gold bugs index in 2008

Silver also fell harder than gold, taking the gold/silver ratio from around 50 to above 80 — meaning that it took 80 ounces of silver to buy an ounce of gold.

Gold/silver ratio in 2008

The world’s governments reacted to the crisis by cutting interest rates to record lows and flooding the financial system with credit. And precious metals and related mining stocks took off on an epic bull market. So it’s easy to see why the investors thus enriched look back on 2008 with nostalgia.


source: tradingeconomics.com

Is History Repeating?
Now fast forward to Autumn 2018. The global economy is booming because of artificially low interest rates and massive lending to all kinds of subprime borrowers. One group of them – the emerging market countries – made the mistake of borrowing trillions of US dollars in the hope that the greenback would keep falling versus their national currencies, thus giving them a profitable carry trade.

Instead the dollar is rising, threatening to bankrupt a growing list of these countries – which, crucially, owe their now unmanageable debts to US and European banks. The peripheral crisis, once again, is moving to the core.

And once again, gold and especially silver are getting whacked. This morning the gold/silver ratio popped back above the 2008 level.

Gold/silver ratio Sept 2018 2008

So are we back there again? Maybe. Some of the big western banks would probably fail if several major emerging markets default on their debts. And historically – at least since the 1990s – the major central banks have responded to this kind of threat with lower rates, loan guarantees and, more recently, massive and coordinated financial asset purchases.

So watch the Fed. If the EM crisis leads to talk of suspending the rate increase program and possibly restarting QE, then we’re off to the races. Just like 2008.

15 thoughts on "Gold And Silver Are Acting Like It’s 2008. They May Be Right"

  1. This analysis is simple but more agreeable than that of on recent COT report. History will not repeat but rhyme.

    1. The Too Big To Fail Banks mis allocated the free money to manipulate the COT and Petrodollar paper futures for immediate profits.
      The Feds dependence on the Petrodollar debt based electronic Currency will create surprises.
      The wild 30 day fluxuation of silver show’s disruptive failure traced directly to too big to Fail players.

  2. In 2008, the US and EM debt levels were small as measured in USD or National GDP.
    The loss of the 111 year old GE alone fractured the core of institutional retirement, pension funds.
    This event is closer to the end of WW I in the ,1920’s.

  3. The USA has a problem with Turkey. It looks like the lira has stabilised and someone is buying Erdogan’s bonds, probably Germany, China or both. Erdogan is determined to challenge the weaponised dollar and this is historic since nobody has taken this position in the past.

    Is it time for the demise of the American hegemony? I am following Turkey with increasing interest and I am sure the Russians are watching too.

    I have written a book (unpublished) about all this and a free PDF of my manuscript is available on request: peter@underco.co.uk

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