How This Gold Scandal Brought Us Black Friday

It’s Black Friday today.

We usually associate the term with retailer sales, massive discounts and buyer frenzy.

Yet, according to the History Channel, the first time the term was used had nothing to do with shopping…but with a massive gold conspiracy, and a crash.

Back in 1869, two Wall Street investors, Jay Gould and Jim Fisk, got together to influence the gold market.

Back then, there was only about US$20 million in gold in circulation. So they figured that anyone with quite a bit of money could influence the price.

So, they started buying gold.

The plan was that they would buy as much gold as they could. Once prices went up, they would sell for a high profit.

But, there was a problem.

You see, back then the government was pretty much setting the gold price. The then president Ulysses Grant was using the gold reserves to buy ‘greenbacks’ from the people.

Greenbacks were paper money issued during the civil war. The Greenbacks weren’t backed by gold, only by the US government. Grant wanted to take them out of circulation to restore sound money.

As the government sold gold to buy greenbacks, it would push the price of the yellow metal down.

So, for the speculator’s plan to work, they needed to stop the government from selling anymore gold. To influence the president, they recruited Grant’s brother in law, Abel Corbin.

The plan worked. The price of a US$100 gold piece jumped from US$132 in greenbacks to US$160 in only a few weeks.

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Yet a misstep by Corbin made the president discover the plot.  To crush the plot, he released US$4 million in gold on Friday 24 September 1869.

The flood of gold decreased the gold price in minutes, but also created a panic, driving the stock market to collapse too.

The US stock market has been running its own ‘sale’ this week.

As you can see below, some of the big losers have included some of the FAANGs, that is, Facebook, Apple, Netflix and Google.

Graph of components of Australia's population growth

Source: A Wealth of Common Sense

[Click to open in a new window]

But the falls have also extended to other sectors like finance, materials and industrial sector. 

Stock prices are falling… will it continue?

The truth is that we don’t know.

And while we aren’t sure why they are falling, we don’t see many reasons for them to go up in the near future.

The stock market has been running higher on low interest rates, debt and the recent tax cuts.

Now all those incentives are ending.

Interest rates are rising, and the US government has already issued a tax cut this year.

Yes, the US economy today is going great.

But back in 2008, high household debt and the subprime mortgages brought the market to a collapse. US household debt is higher today than back then.

From Thinkadvisor:

U.S. households have been taking on more debt for 17 straight quarters, leading to a total debt burden of $13.51 trillion at the end of the third quarter, according to the New York Fed.

‘That’s 21% higher than the peak reached 10 years ago, in the third quarter of 2008 during the great financial crisis, and 1.6% higher than the debt level in this year’s second quarter.

‘In addition to debt levels, delinquency rates also increased in the third quarter, from 4.5% in the second quarter to 4.7% in the third, reaching the highest rate in seven years.

Consumer’s debt is high, and delinquencies are rising. This could translate into less consumer spending.

But, this time there is also high US government debt…

…and US corporate debt is rising.

The thing is, as Bloomberg recently pointed out, all that corporate debt is not translating into more investments to boost productivity and pay off that debt.

Despite strong incentives in the Republican tax plan for American executives to expand, invest and ultimately boost the U.S. economy’s growth potential, a lot of the debt companies are issuing appears to be motivated by something else.

‘Non-financial corporate debt stands at 45.6 percent of gross domestic product, near the highest in post-war record keeping. Despite that, non-residential investment — a broad category in the national accounts that includes everything from office buildings to software — has only been bouncing around the 13 percent of GDP range since 2012.

‘“You would think that companies want to add to productivity capacity but we really haven’t seen it,’’ said Priya Misra, head of global rates strategy at TD Securities USA. “If they view the economy as in the late stages of the expansion, then there isn’t a lot of confidence about the outlook and it is easier to buy back stock.’’

‘It’s difficult to trace the uses of money raised from debt through the various accounts in the economy. But one worry is that rising corporate borrowing isn’t sustainable if the trend is more about transferring cash to owners rather than investing in assets or innovations that can produce more cash to pay future bills.

And, there is still all the uncertainty coming from Brexit, Italy’s debt and the US–China trade war.

That’s why we don’t see many things that could push the stock market higher in the short term.

In fact, we see a big collapse coming.

And this time, the US Federal Reserve doesn’t count with money printing or low interest rates to soften the blow.


Selva Freigedo,
Editor, Markets & Money

PS: Author and economist Harry Dent predicted Japan’s 1989 collapse, the 2000 dotcom bust and the 2008 subprime flop. He now has a chilling warning for Australian property. To read more about it click here.

Selva Freigedo is an analyst with a background in financial economics. Born and raised in Argentina, she has also lived in Brazil, the US and Spain. She has seen economic troubles firsthand, from economic booms to collapses and the ravaging effects of hyperinflation, high unemployment, deposit freezes and debt default. Selva now writes from her vantage point here in Australia. She is lead Editor at the daily e-letter Markets & Money. And every week, she goes through each report and research note produced by our global network of trusted advisors to find the best investment opportunities for you in Australia and overseas. She packages these opportunities for you in Global Investor.

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